From time to time I get a question about the concept of using a whole life insurance policy to “bank”. This concept has been popularized under the trademarked terms “Infinite Banking®” (IB) and “Bank on Yourself®” (BOY) and prior to that, Lifetime Economic Acceleration Process® (LEAP). I usually refer readers/listeners back to an article I wrote about eight years ago called “A Twist on Whole Life Insurance“.
Honestly, very little has changed about all of this in the last eight years, so, if you are one of the 23 people (including my mother) who were reading this blog back then, you can skip the rest of this article. If this is the first time you have heard of this concept, then read on to get the unbiased truth about it. Today I'm going to cover the seven truths you need to know about “banking” with a whole life policy. But first, a quick explanation of what it is if you have not yet been exposed.
Definition of Infinite Banking/Bank on Yourself
The basic concept behind IB/BOY/LEAP is to get a bunch of cash value into a whole life policy and then, whenever you have a need for cash, you borrow that money against the policy cash value instead of borrowing it from a bank, withdrawing it from your bank account, or selling an investment. When you die, the death benefit is used to pay off the loans, with any remaining death benefit going to the policy beneficiaries (usually your heirs). Instead of having to go to the bank to get a loan, you can simply “borrow” the money from yourself. No matter what your credit score or the purpose of the loan, you can always get that loan from the policy at the terms set up when you bought the policy. Thus you are now “banking on yourself” instead of having to go to a bank. Okay, to be fair you're really “banking with an insurance company” rather than “banking on yourself”, but that concept is not as easy to sell. Why the term “infinite” banking?
The idea is to have your money working in multiple places at once, rather than in a single place. It's a bit like the idea of buying a house with cash, then borrowing against the house and putting the money to work in another investment. If you keep repeating this process “infinitely” you can have your money “working in multiple places at once”. Some people like to talk about the “velocity of money”, which basically means the same thing. In reality, you are just maximizing leverage, which works, but, of course, works both ways.
Frankly, all of these terms are scams, as you will see below. But that does not mean there is nothing worthwhile to this concept once you get past the marketing.
Let's get into seven truths about IB/BOY/LEAP, so you can see through the cloud of half-truths and outright lies surrounding this concept to understand how it really works.
# 1 Infinite Banking Requires You to Buy a Whole Life Policy
Step one in IB/BOY/LEAP is to buy a whole life insurance policy. Whole life insurance has a terrible reputation, and for good reason. It is dramatically oversold. According to the Society of Actuaries, approximately 80% of policies sold are surrendered prior to death, which is an abysmal statistic considering it is a policy designed to be held your entire life. When I have polled doctors that have actually purchased whole life insurance, 75% of them regret purchasing the policy. The whole life insurance industry is plagued by overly expensive insurance, massive commissions, shady sales practices, low rates of return, and poorly educated clients and salespeople. But if you want to “Bank on Yourself”, you're going to have to wade into this industry and actually buy whole life insurance. There is no substitute.
Be careful while you're in there. Most agents will not sell you the right kind of whole life policy to do this properly. In fact, many of them will try to sell you something besides a whole life policy, usually some type of universal life policy such as variable universal life or index universal life. Bad idea. If you want to be an “Infinite Banker”, you need a whole life policy. The guarantees inherent in this product are critical to its function. You can borrow against most types of cash value life insurance, but you shouldn't “bank” with them.
As you buy a whole life insurance policy to “bank” with, remember that this is a completely separate section of your financial plan from the life insurance section. You are not buying this policy in order to replace lost income in the event of your death. Buy a big fat term life insurance policy to do that. As you will see below, your “Infinite Banking” policy really is not going to reliably provide this important financial function.
Another problem with the fact that IB/BOY/LEAP relies, at its core, on a whole life policy is that it can make buying a policy problematic for many of those interested in doing so. If you have medical problems that make you more expensive (or impossible) to insure, this is not going to work well for you. Dangerous hobbies such as SCUBA diving, rock climbing, skydiving, or flying also do not mix well with life insurance products. The IB/BOY/LEAP advocates (salespeople?) have a workaround for you—buy the policy on someone else! That may work out fine, since the point of the policy is not the death benefit, but remember that buying a policy on minor children is more expensive than it should be since they are generally underwritten at a “standard” rate rather than a preferred one.
# 2 The Policy MUST Be Structured Correctly
Most whole life insurance policies are not structured properly to do “Infinite Banking”. Most policies are structured to do one of two things. Most commonly, policies are structured to maximize the commission to the agent selling it. Cynical? Yes. But it's the truth. The commission on a whole life insurance policy is 50-110% of the first year's premium. Sometimes policies are structured to maximize the death benefit for the premiums paid. This is also a bad thing for an IB/BOY/LEAP policy. The point of an IB/BOY/LEAP policy is NOT the death benefit. It's to allow you to “bank”. So you do not want the policy structured for that purpose. There are three critical aspects of an ideally structured policy:
Maren navigates her way through a tight spot in Shillelagh Canyon in Southern Utah. She doesn't care about BOY, and maybe you shouldn't either.
Paid-Up Additions
With an IB/BOY/LEAP policy, your goal is not to maximize the death benefit per dollar in premium paid. Your goal is to maximize the cash value per dollar in premium paid. The rate of return on the policy is very important. One of the best ways to maximize that factor is to get as much cash as possible into the policy. You want the ratio of premiums to death benefit to be as large as it is legally allowed to be without becoming a Modified Endowment Contract (which prevents the tax-free loans that are the point of the whole system). The best way to improve the rate of return of a policy is to have a relatively small “base policy”, and then put more cash into it with “paid-up additions”. Instead of asking “How little can I put in to get a certain death benefit?” the question becomes “How much can I legally put into the policy?” With more cash in the policy, there is more cash value left after the costs of the death benefit are paid. That leaves more cash for the dividend rate to be applied to each year. An additional benefit of a paid-up addition over a regular premium is that the commission rate is lower (like 3-4% instead of 50-110%) on paid-up additions than the base policy. The less you pay in commission, the higher your rate of return.
The rate of return on your cash value is still going to be negative for a while, like all cash value insurance policies. But instead of breaking even after the typical 10-15 years, using paid-up additions allows you to break even in as little as 3-5 years.
Non-Direct Recognition Loans
This concept is a little harder to wrap your mind around but is still absolutely critical to IB/BOY/LEAP. Some life insurance policies are “direct recognition” while others are “non-direct recognition”. These terms apply to loans against the policy.
Let's say you have a policy with $200K in cash value in it and you decide to borrow $50K from the insurance company against the policy. Like all loans, this loan is tax-free. But it is not interest-free. In fact, it may cost as much as 8%. Most insurance companies only offer “direct recognition” loans. With a direct recognition loan, if you borrow out $50K, the dividend rate applied to the cash value each year only applies to the $150K left in the policy. Seems fair, right? Why should they pay you a dividend on money that is being used elsewhere? However, there are a few insurance companies that offer non-direct recognition loans on their policies. With a non-direct recognition loan, the company still pays the same dividend, whether you have “borrowed the money out” (technically against) the policy or not. Crazy, right? Why would they do that? Who knows? But they do. Often this feature is paired with some less beneficial aspect of the policy, such as a lower dividend rate than you might get from a policy with direct recognition loans.
While there are plenty of magicians in the insurance industry, there is no magic. The companies do not have a source of magic free money, so what they give in one place in the policy must be taken from another place. But if it is taken from a feature you care less about and put into a feature you care more about, that is a good thing for you.
Wash Loans
Just because you maximize the paid-up additions and ensure the policy offers non-direct recognition loans, all is not yet hunky-dory. There is one more critical feature, usually called “wash loans”. While it is great to still have dividends paid on money you have taken out of the policy, you still have to pay interest on that loan. If the dividend rate is 4% and the loan is charging 8%, you're not exactly coming out ahead. Some policies offer “wash loans”, usually starting after a few years.
With a wash loan, your loan interest rate is the same as the dividend rate on the policy. So while you are paying 5% interest on the loan, that interest is completely offset by the 5% dividend on the loan. So in that respect, it acts just like you withdrew the money from a bank account. There is no interest charged on withdrawals, but there is also not interest paid on that money once it is withdrawn. 5%-5% = 0%-0%. Same same. Thus, you are now “banking on yourself.”
Without all three of these factors, this policy simply is not going to work very well for IB/BOY/LEAP.
# 3 Most of Those Talking About This Concept Stand to Profit from It
The biggest issue with IB/BOY/LEAP is the people pushing it. Nearly all of them stand to profit from you buying into this concept. They may be selling seminars, books, or online courses, but most commonly they are simply selling whole life insurance, hoping to earn those fat commissions. In fact, there are many insurance agents talking about IB/BOY/LEAP as a feature of whole life who are not actually selling policies with the necessary features to do it! The problem is that those who know the concept best have a massive conflict of interest and generally inflate the benefits of the concept (and the underlying policy). They would have you believe it is a Secret Magic Pathway to Wealth, when in reality all it does is help you earn a bit more interest on your cash in the long run. The amount of hype in the books, courses, and websites is unbelievable and reflects significant misunderstandings even among many of its proponents.
# 4 It Allows You to Earn More on Your Cash in the Long Term
The real benefit of IB/BOY/LEAP is that you will probably earn a little more on your cash over the course of your life than you would in a bank account, at the cost of a few years of crummy returns on your money. Seriously, that's it. You would never know it from all the hype. Proponents want you to compare borrowing from life insurance to borrowing from the bank. “Wouldn't it be nice,” they say, “if you could always qualify for a loan to buy your next house, car, RV, or boat?” But that is the wrong comparison. You should not be comparing borrowing against your policy to borrowing from the bank. You should compare borrowing against your policy to withdrawing money from your savings account.
Go back to the beginning. When you have nothing. No money in the bank. No money in investments. No money in cash value life insurance. You are faced with a choice. You can put the money in the bank, you can invest it, or you can buy an IB/BOY/LEAP policy. Let's see what happens when you want to get a boat 10 years from now with each of these options:
Money in Bank
You put a bunch of money in the bank. It grows as the account pays interest. You pay taxes on the interest each year. When it comes time to buy the boat, you withdraw the money and buy the boat. Then you can save some more money and put it back in the banking account to start to earn interest again.
Money in Investments
You invest a bunch of money. It grows over the years with capital gains, dividends, rents, etc. Some of that income is taxed as you go along. When it comes time to buy the boat, you sell the investment and pay taxes on your long term capital gains. Then you can save some more money and buy some more investments.
Money in IB/BOY/LEAP Policy
You buy a policy and stuff as much cash in it as it allows. The cash value not used to pay for insurance and commissions grows over the years at the dividend rate without tax drag. It starts out with negative returns, but hopefully by year 5 or so has broken even and is growing at the dividend rate. When you go to buy the boat, you borrow against the policy tax-free. Then you can save some more money and use it to pay the policy loan. As you pay it back, the money you paid back starts growing again at the dividend rate.
Those all work pretty similarly and you can compare the after-tax rates of return. The fourth option, however, works very differently.
Borrow for the Boat
You do not save any money nor buy any sort of investment for years. Then you want to buy the boat, so you go to the bank. They run your credit and give you a loan. You pay interest on the borrowed money to the bank until the loan is paid off. When it is paid off, you have a nearly worthless boat and no money.
As you can see, that is not anything like the first three options. It is nonsense to somehow equate any of the first three options to that fourth one. So IB/BOY/LEAP really is not about “banking on yourself”, it is simply a different way to invest your money. While it is an inferior way to invest your money for the first 5+ years, eventually it is a better way than just a bank savings account. It is nearly as liquid and safe and has higher long term returns. Of course, its returns are nowhere near what you should earn long term in an investment like stocks or real estate, even after-tax. So it is not going to be some magic pathway to wealth. But it will help you earn a little more on your cash long-term.
# 5 The Other Benefits
Of course, there are other benefits to any whole life insurance policy. For example, there is the death benefit. While you are trying to minimize the ratio of premium to death benefit, you cannot have a policy with zero death benefit. Nor can you “borrow out” the entire death benefit. So there will always be at least a little death benefit for your favorite heirs or charities. In addition, about half of the states provide significant asset protection to the cash value in life insurance policies. So in the (admittedly incredibly unlikely) event that you are successfully sued above policy limits and have to declare bankruptcy, you may get to keep any cash value you have not already borrowed out.
# 6 It Is Not Magic
Unfortunately, those are really the only benefits. Everything else is hype or even scam. IB/BOY/LEAP is not a magic pathway to wealth. In fact, it can even retard your wealth-building if it keeps you from investing in assets/investments with higher returns. If you are skipping 401(k) or Roth IRA contributions in order to fund this policy, you are almost surely coming out behind. This does not replace real estate investing; it is simply a way to save up to buy the real estate that will actually build your wealth. Some people selling these policies argue that you are not interrupting compound interest if you borrow from your policy rather than withdraw from your bank account. That is not the case. It interrupts it in exactly the same way. The money you borrow out earns nothing (at best—if you do not have a wash loan, it may even be costing you). If you are the type to keep a lot of cash around (perhaps while waiting to find your next real estate deal), this is simply a way to earn 3-5% instead of 1-2% on it, in the long run. That's it. Not so sexy now is it?
# 7 It Is Not Revolutionary
A lot of the people that buy into this concept also buy into conspiracy theories about the world, its governments, and its banking system. IB/BOY/LEAP is positioned as a way to somehow avoid the world's financial system as if the world's largest insurance companies were not part of its financial system. Your money is still denominated in dollars, subject to inflation. It is invested in the general fund of the insurance company, which primarily invests in bonds such as US treasury bonds. No magic. No revolution. You get a little higher interest rate on your cash (after the first few years) and maybe some asset protection. That's it. Like your investments, your life insurance should be boring. If it is making you excited and you feel a need to go proselyte it to your friends and family, you are likely mistakenly buying into the scammier aspects of the concept.
Infinite Banking/Bank on Yourself is not a scam, but the way it is sold frequently feels scammy. It is not a magic way to build wealth but may help you earn a little higher rate of return on your invested cash in the long run and provide a bit of asset protection you probably don't need.
What do you think? Do you Bank on Yourself? Are you an Infinite Banker? What has your experience been like? Comment below!
Jim,
Thanks for straight talk on (often) inappropriate insurance products. You deserve a consumer protection award!
A couple other dangerous twists I’ve been hearing about:
1) using leverage especially on 10-pay IUL policies. Here, you borrow money from the bank to pay the early premiums, then pay the bank back by taking a loan on your accumulated cash value. I know, right, nothing wrong with taking out a loan to be able to take a loan to pay back that loan…
2) using “blending” where you buy some term insurance to make sure you can buy more paid up additions and “stuff” the policy. This can actually cause even whole life insurance to blow up if you can no longer afford to pay the premiums on the blended term insurance, or it it lapses and MEC’s.
It is difficult to even write a legible paragraph about these products. When a salesperson’s “job” is to spend hours explaining a product that they likely don’t even understand themselves, you’d be best to avoid it all together.
1. Covered it: https://www.whitecoatinvestor.com/financing-whole-life-insurance-premiums/
2. I agree a blended policy is simply a way to sell someone a whole life policy who doesn’t have the money to buy a purely whole life policy. Hopefully it eliminates one issue with buying whole life–that you don’t buy enough total life insurance to meet your needs. More info on blended policies: https://myjourneytomillions.com/articles/what-is-a-blended-whole-life-insurance-policy/
Jim,
These “dangerous twists” are just ARE dangerous but they are not really “twists” to IBC. They are not IBC at all. And anyone telling you that you can “do IBC” with these is flat out wrong, and should be avoided. It’s like calling a Ponzi Scheme a “dangerous twist” on investing. It’s not a “dangerous twist”, it’s not investing. It’s just wrong.
It’s all a scam!
Whole life insurance policies never made any sense to me. If it is an investment why can I not have my dividends back without having to pay interest? Why not put the money in the bank and have access to it at any time without having to pay to get it? It’s my money, or so the salesmen say. I always used the old adage of buy term and invest the difference. “But the term policy will expire and you’ll have nothing,” say the salesmen. Nothing but far lower premiums. If you do things right there will be a time when you will have no need for life insurance. As the commercial says, “Only pay for what you need.”
You don’t have to pay back the loan you borrow against your policy.
Why don’t I buy term and invest the difference?
The loan you take out on he policy is always paid back. It’s taken from your death benefit if you don’t pay it back before then.
That’s correct. You don’t have to pay back, but either you or your heirs/estate using the death benefit to do so will.
some insurance agents market insurance policies as tax-free income in retirement. That’s on partially correct. Yes, you don’t have to pay taxes on the dividend income the policies provide, but the majority of the withdraw will be your PUA contributions which is your after-tax money in the first place, similar to withdrawing ROTH contributions.
I wouldn’t call it correct at all. It’s not “income”, and that’s why it is tax-free. You can borrow against anything- your house, your car, your insurance policy etc. It all works the same way–tax-free but not interest free. You don’t pay taxes on the basis in your mutual fund shares that you sell either. With a wash loan and non-recognition dividends, you could call it interest-free, but I still wouldn’t call it income. It spends the same way though!
It’s just marketing. The key is to understand how it works (and you do) and then decide if you want it or not. If it is a good value proposition to you, then go for it. If it isn’t, then skip it. It is to you. It isn’t to me. Different strokes for different folks.
The main problem I see is huge whole life policies being sold to doctors at 30 who still owe $250K in student loans, aren’t maxing out retirement accounts, don’t actually buy enough insurance to cover their insurance needs etc. Their greatest financial needs are hardly a bank account that will pay higher interest in the long run. These are just being sold inappropriately.
I think this was your best article regarding whole life yet. Props to your latest contributors as well Dr.K Asakura. Thanks for the Pro/Con format it is a nice change to see you posting differing opinions You are absolutely correct that you must completely understand what you are buying and why you are buying it.
Not many people take the time to study the tax code and how whole life can save you more than you could ever contribute to your 401k, backdoor Roth, Sep IRA, etc. if you are the owner of a practice in the health care field.
I very rarely respond to blog posts because most blog post don’t apply to my situation.
The problem with the Whole life “sales person” model is you take my situation.
Business owner with 9 locations, staff of 30, 5 commercial real estate buildings, and now has their WL fully paid up, and you try to make it work for some doctor who never wants to be an owner entrepreneur.
The sale person reads and article, hears of a “water cooler” story about a person that made WL work to all its advantages and sells it to everyone thinking the result will be the same. You are correct that it isn’t the whole life insurance, it is the person using all the advantages WL can offer to fund their entrepreneurial spirit.
Whole life if used correctly is like absolutely like a HELOC. You pay for it, constantly use it, repay it and use it some more. Once you have achieved your desired retirement goals, stop and enjoy the dividends and you still have some death benefit to leave to your estate to pay for your taxes:)
like i said if you do your research you can get a marginal tax savings every year of 40+ percent.
Not sure what you’re referring to with your retirement plan vs whole life comparison nor your “40+ percent marginal tax savings”, but I think it’s usually a big mistake to fund a whole life policy as an investment or a bank before maxing out your retirement accounts. That’s usually a much better use of money.
CW,
I think you get it. The difference though between WL/IBC and a HELOC is control. With a HELOC, you still have to take the time an jump through the hoops to qualify for the loan. Also, the E (Equity) part can fluctuate wildly. With WL, you can have your money within a matter of days and the only question will be “What is your cash value?”. And if you are actually repaying the WL loan (which you should) if you get into a pinch you can CHOSE to modify your payment terms to be whatever you want them to be, and they won’t take you policy (or your house!). The “E part” (equity) of your WL policy will ALWAYS go up. And part (most) of it at a GUARATEED rate. It will NEVER go down.
Yes, you are guaranteed the ability to be able to borrow against the cash value, but the terms on a HELOC are still usually better.
The INTEREST rate may be better, but how can the repayment terms be better than “pay it back if and when you want”? And the qualification terms? “Yes. You qualify.” Sounds pretty easy to me. And I can have the money within DAYS.
I prefer leveraging a HELOC too. It’s a great way to have access to the equity in your home. Totally worth the $50/year. I use mine all the time.
“Pay it back if and when you want” sounds great until you consider human nature.
For the vast majority of people, this will turn into “don’t pay it back, let my kids deal with it.”
That’s a good way to end up leaving them a lot less, potentially nothing.
You can take the dividends if you want. Obviously the cash value will grow slower than if you reinvest the dividends in the policy. A dividend is considered a return of capital so they are tax-free, at least until the total dividends paid are greater than the total premiums paid which is unlikely to happen in the first few decades, if at all.
I agree with you that buying term and investing the difference is the way to go for your insurance needs. But we’re not discussing your insurance needs today. We’re discussing using an insurance policy “to bank.”
True. My bad.
TWCI,
Something else we’re not discussing today is investing. Not investing IN a WL policy anyway. We are discussing using WL to bank. And as with any other tool we use as a bank, we CAN use the capital accumulated in said bank to invest, in whatever we wish.
As for the death benefit though, bay practicing IBC to its fullest, one will end up with as much death benefit as the underwriters will allow. You may or may not be able to fully meet your death benefit needs in the early years with a properly constructed IBC policy, but if not, then purchase additional term insurance to fill the gap.
I’m curious, have you actually ready R. Nelson Nash’s book, “Becoming Your Own Banker”? I’m guessing now, because most of the misunderstanding that you have about IBC are covered in the book. Nelson talks about what you refer to as “your insurance needs” (by which YOU mean “death benefit”) when he says “your need for finance, during your lifetime, is much greater than your need for protection. Solve for this need through this instrument and you will end up with more life insurance (death benefit) than the companies will issue on you.”
I don’t have a life insurance need. That’s the case for most of the lives of most of my readers. Most of us only have a need from age 30 to age 50 or so. One issue with any type of permanent life insurance is you HAVE to buy insurance that you don’t need. There’s a cost to that and you’re the one who pays that cost.
Maybe it’s not a “need”, but it’s a great BENEFIT. A way to pass substantial wealth to your family tax and probate free.
And you haven’t answered my question about the book. You say you have studied and researched IBC, but you can’t get the name right and I’m pretty sure you haven’t ready the “owner’s manual”.
I agree Mark, R. Nelson Nash lays out the proper way to utilize IBC. It took me 6 months or researching pro’s and con’s along with reading two of his books before I decided utilizing a properly constructed WL policy to build my bank was the right way to go.
This article is very thoughtful and well written however anyone looking into utilizing IBC should absolutely study R. Nelson Nash’s work and only work with an insurance professional who strictly follows the guidelines laid out within.
Glad you’re happy with your policy.
3-5% tax free dividend from insurance policies is better than 1-2% taxable interest from savings accounts right?
Not if you have to pay interest to use your own money….
The amount you borrow still earns dividend and interest in the policy. For Non-direct recognition, you earn the same dividend and interest for both loaned and non-loaned portion of your cash value. For Direct recognition company, you most likely earn a slightly lower dividend and interest on the loaned portion of cash value. (It is not correct in your article as you implied that the Direct recognition company does not pay dividend to the loan portion – check your fact).
Regardless, the dividend and interest earned for the cash value is eventually more than the interest cost you pay to borrow money due to “earning on compound interest on cash value vs paying simple interest on the loan”. So it is wrong to think that “you have to pay interest to use your own money…”
Is it though? To have large sums of money tied up into a single complicated insurance/financial product because you might one day make a big purchase and use the money just to gain 2-3% over savings? Far easier, more flexible, and profitable to get market returns in the mean time. Sure there might be some capital gains to pay but not so much if you raise the money via selling your worst performing holdings. Or if you’re using the money in retirement and stay at the 0% capital gains rate.
It might not be fair to compare returns to stocks but it’s not fair to compare them to a savings account either. Few folks keep hundreds of thousands of dollars in a savings account long term. In reality portfolio liquidity comes from many sources- savings, CD ladders, bonds, dividends, active/passive income, and sure stocks too. It’s not hard to have a diversified, liquid portfolio beating those returns without having a bunch of money tied up with an “insurance” policy that 80% of people surrender for a variety of reasons. Just doesn’t sound like a good deal to me to get that kind of return.
Not quite that simple, but yes. You see, you’re trading a negative return for the first few years for a 3-5% return for most of the life of the policy. And yes, there is no tax on the dividends (at least for a long time) whether they are left in the policy or distributed. (Most of the time they’re left in the policy).
Regarding your sentence: You see, you’re trading a negative return for the first few years for a 3-5% return for most of the life of the policy.
Is that 3-5% return for most of the life of the policy an ANNUAL return or an overall long-term return, or what? (The only way I can follow is doing trial calculations).
If it’s an annual return, then based on a policy cash value of $100,000, then using the BOY system (correctly structured as you point out) you would be able to enjoy the benefits of $3000 to $5000 annually, ad infinitum (until death). Is that right? If so, in case you need 30k to 50 per year you would need a million bucks cash value in the [correctly] structured policy.
yes, I max out and invest in tax-deferred accounts, Roth, real estate etc first and also get term life insurance through my workplace… then, I park my are emergency fund/reserve/opportunity capital in in high cash value policies for instead of regular savings accounts because of tax-free dividend and it’s just as liquid. With Non-Direct Recognition
wash loans (i.e. your dividend = your loan interest) , you still come out ahead because you earn compound interest on your FULL cash value balance while paying simple interest on your loans.
Again, high cash value policy is like a savings account, meaning you can’t lose your capital. When you talk about ‘invest the difference’, then you might lose your money.
Have you checked what will happen to that accumulated cash value if you die?
The cash value is not something extra to the death benefit or something you lose when you die. The cash value is a sub-amount of death benefit you have access to when you are alive. Think of it as a HELOC on your house, it’s still part of the overall house value.
I like the HELOC analogy. That’s a good way to think about it.
I suggest you re-check that. In the cases I have seen WL is written so your heirs get the death benefit but lose the cash value when you die. You need to have a policy rider in order to get the cash value which as in all cases adds to the cost of the policy.
https://www.insure.com/life-insurance-faq/leftover-cash-value-life-insurance.html
You understand the cash value and the death benefit are not two separate pots of money, right? There’s just one pot of money. The “cash value” is just death benefit that you can borrow out or that you get if you surrender the policy.
Yes, I agree. What I am trying to say is building cash value seems unattractive given that in the end you receive no more than the death benefit (minus loans). I don’t see how we can compare the growth of cash value to a savings account when in one case your estate keeps the final sum plus a death benefit (savings account + term life) while in the other (WL) your estate at best gets the death benefit.
Bad comparison. First because almost no one keeps term life until they die at 80, 90 or whatever. It’s pretty expensive to do so. The reason people buy term and investment the difference is because it comes out ahead when you cancel it at age 50 or 60 when you reach FI.
Second, even if you did that, you would have to buy two things so you would expect it to provide you two things. With the whole life, you’re only buying one thing. So you only get one thing. The one thing is either paid out as cash value or as death benefit, but it is the same thing.
It’s always been intuitively obvious that infinite banking was shady but I never did the research to figures out exactly what they were doing. What a great and readable analysis!
There’s nothing inherently “shady” about the IBC concept. If it’s structured correctly. The author contends all the disadvantages of having an incorrectly structured policy and I agree. But what other savings vehicle will give you:
Guaranteed tax free growth
Instant liquidity
Full control
I’ll answer. There is none. This all assumes the policy is structured correctly to maximize cash value and minimize commissions.
You can put your money into a brokerage account. When you need money, you can take a margin loan- as with any loan, the proceeds are tax free. You pay interest to the broker. Your investments continue to grow, all of them. Margin rates can be quite low. Since the loan is secured by your brokerage assets, there is no credit application.
If you die with the loan outstanding, your estate settles up with the broker by paying off the loan and passing what is left to your heirs. There will be no income tax to the heirs on the inheritance.
Meanwhile, you avoid paying commissions or other costs of the insurance policy.
You are not tied to the broker you initially picked. You can transfer your account anywhere you like while accumulating. You would need to pay off the loan to move your account once you have started taking money out. But you could put some money in Broker B, borrow the amount needed to pay off Broker A, then move the rest of your assets to Broker B.
The, minimal, downsides of this approach: returns can be more volatile, depending on how you invest the money. It could be comparable to life insurance, without the expenses, if you invest in bonds. The return could be higher if you invest in stocks but you face some Investment risk.
If you borrow a lot compared to your assets with the broker, you risk a margin call. Don’t borrow too much. On the other hand, you also do not risk a policy lapse and big tax bill for the, now taxable, cash accumulation in the policy.
Margin loan rate is low???
Again the #1 goal of high cash value policy is to preserve capital so it’s not fair to compare it with other risky investments.
While I agree the risk is similar to a bank account (maybe a little more), it is long term money. So one could make a case that it should be compared to long term investments. That’s one reason I don’t own a policy. I don’t want to tie up money for 50 or 60 years and then earn 3 or 4% on it.
I like the fact that the cash value is guaranteed and earns above savings rate You can borrow against it to make opportunistic investment to boost the overall return. Pay it back and repeat.
That’s not really fair to say it “boosts the overall return.” That’s like saying taking money out of your savings account and buying stocks with it boosts the return of the savings account.
The problem with pulling money out of savings account to buy stocks is that you are no longer earning interest on the amount you pull out. With IB policies, even with wash loans, there’s still some interest arbitrage because of compound interest vs simple interest. The difference can be minimal or large depending on your cash value balance. The ultra-rich may benefit from the interest arbitrage, but not everybody.
You mean the dividends are compounding and the loan is simple interest? That’s a pretty trivial advantage and anyone pumping that is probably just trying to sell you a whole life policy.
How is it trivial? You’re making additional compound interest at guaranteed rates PLUS dividends also compounded. Doesn’t sound trivial at all to me.
Would you recommend that a consumer let their funds sit in a bank at 0.1%-0.2%?
I would rather have 4%-5%.
You seem confused that there are two sources of return here. There isn’t. Just one.
By the way, MMFs and high yield savings accounts are now in the 4% range. Much harder to get excited about dealing with an insurance company to get that now eh?
1. Whole life insurance provides guarantees, mutual funds and stocks have none. 2. Infinite banking is an added bonus to a WL policy. 3. Commissions paid for WL are paid as part of a premium, however they do not reduce your cash value. It’s already built in. 4. Commissions paid for stocks and mutual funds directly reduce the value of your accounts. Front load fees can be up to 6% and the annual fees 1 to 2% of your balance. The more you have in there, the more they get in commission. If you give somebody $1 million to put in a mutual fund, you might have to give up $60,000 up front then you start off with $940,000 in account. Then your balance is reduced $10,000 to $20,000 annually. You don’t make any money off of what they take. Losses are amplified due to Losing an extra 1 to 2% in commissions. At least with WL there are guarantees and your cash value is not affected by commissions. You’re paying commission either way.
Ha ha ha.
Commissions for mutual funds and stocks. Ha ha. That’s good.
That’s what we call a “straw man argument.”
Whole life looks good compared to setting all your money on fire too, but that doesn’t make it a smart thing to buy, especially the policies that are typically sold. Let’s at least compare the better whole life policies to the better mutual funds, none of which charge commissions.
Yes, margin rates can be quite low. Considerably lower than rates charged on life insurance loans.
Interactive Brokers current margin rates 1-1.6%
https://www.interactivebrokers.com/en/index.php?f=44427&gclid=Cj0KCQiAkuP9BRCkARIsAKGLE8VuXl27cnLmSKdB2T2QbHpJNNKng_1TZ5St6C-GXluvNQqhCJ13c0UaAldLEALw_wcB
I certainly am no fan of whole life for 99%+ of prospective purchasers. That said, margin loans on a brokerage account are callable at the worst possible times.
Don’t depend on your HELOC as an emergency fund and don’t be surprised when your margin loan gets called at a time when the market turns down 30%+ and you’d like to buy more, not sell at the bottom.
Note that you can make a universal life policy act like a whole life policy by basing the premium payments on a conservative estimate of returns. At its most conservative, base them on the guaranteed returns of the policy. You might be able to get a universal policy at lower commissions than the whole life.
None of the BOY/IB advocates recommend you do it with a universal life policy.
Specifically, why not an IUL?
Also what about the advantage of adding a long term care rider to the policy, since so many of us will need LT care and insurance is hard to come by or not very good? Not sure if this is available with both whole life and IUL.
1) The lack of guarantees particularly on the tail end generally make universal life less ideal for BOY than whole life. Even its greatest proponents will argue for whole life.
2) I hope most of my readers can self-insure LTC and need neither LTC insurance nor whole life/universal life with a rider for that purpose. I’m not a fan of either, but the jury is probably still out on which is better if you actually need that insurance. Remember just because you need long term care doesn’t mean you need long term care insurance.
In your Point #2: “Most commonly, policies are structured to maximize the commission to the agent selling it. Cynical? Yes. But it’s the truth. The commission on a whole life insurance policy is 50-110% of the first year’s premium.”
– You probably know most policies that were not structured for the purpose of IB Concept. If they are truly structured for IBC then commission would not be even 50% of the the first year’s premium. If you really discuss about WL policy for IBC, then you should look at the commission of the policies designed for IBC, not a commission for general WL policy. DO NOT CONFUSE between the two as to pick the high commission of general WL to apply for WL for IBC. See the excerpt from below:
How Life Insurance Agents are Compensated:
There is a mindset that permeates the world of finance that the main reason permanent cash value life insurance is sold is because licensed insurance agents get paid a lot of money. While explaining all of the benefits of Specially Designed Life Insurance Contracts (SDLIC) and the reasons it creates flexibility, access, and control of your money is valuable, we feel the best way to take this issue off the table in the minds of the public is to explain in great detail how a licensed insurance agent is compensated. Mutual Insurance Company (MIC) all have different contracting patterns and establish relationships with licensed agents in multiple ways. Some agents may be W-2 employees of the MIC and are normally limited to using only that company’s products. Other agents may establish a 1099-Independent Contractor status with MIC’s and therefore have the ability to represent multiple companies at one time. Understanding what type of relationship an agent has with the company they are recommending to you can help you analyze whether the policy design is optimal for your situation. MIC’s all compensate an agent in a similar manner with a focus on First Year commissions and Renewal commissions. First year commissions will be paid dependent on the design of the SDLIC and the mix between Base premiums and LPUA’s. The Base premium is where the bulk of the first year and renewal commissions are paid. Depending on the product offered by a MIC, the standard agent compensation is 50%-60% of the base premium in the first year. Then over the next nine years (Years 2-10), the agent could be compensated an amount equal to 5%-10% of the base premium. This amount is usually higher in years two through four and lower from years five through ten. Then beyond year ten, the agent would receive a service fee equal to 1%-2% of the base premium paid as long as the policy remains in force. The agent also receives compensation for any Paid-Up Additions (LPUA or SPUA) put into the policy. This amount would equal 2%-4% of the PUA and similar to base premium compensation, the earlier the PUA is contributed to the policy, the greater the percentage in commissions paid.
Here is an example so you can see in print what the total compensation looks like for a licensed agent over the entire capitalization period (seven years):
Annual Policy Premium $ 100,000:
– $ 30,000 Base Premium Base Premium Compensation – Year 1 $ 30,000 X 55% = $ 16,500
– $ 70,000 LPUA Premium LPUA Premium Compensation – Year 1 $ 70,000 X 2% = $ 1,400
TOTAL FIRST YEAR COMPENSATION = $ 17,900
Years 2 – 7 Compensation on $ 100,000 Annual Premium:
– $ 30,000 Base Premium Base Premium Compensation – Year 2-7 $ 30,000 X 5% = $ 1,500 Each Year
– $ 70,000 LPUA Premium LPUA Premium Compensation – Year 2-7 $ 70,000 X 2% = $ 1,400 Each Year
YEARS 2-7 COMPENSATION = $ 2,900 Each Year
YEARS 2-7 COMPENSATION = $ 2,900 X 6 Years = $ 17,400
Over seven years the agent has been compensated $ 35,300 to design and implement the SDLIC. Is that too much compensation? How do you judge whether the level of compensation is fair or not?
Let’s compare this compensation to a Registered Investment Advisor who charges a client a 1% management fee to invest their money in securities. We will invest $ 100,000/ year for seven years to keep the comparison apples-to-apples.
Invest $ 100,000 Annually and pay a 1% management fee:
– Year 1 – $ 100,000 invested @1% fee = $ 1,000
– Year 2 – $ 200,000 invested @1% fee = $ 2,000
– Year 3 – $ 300,000 invested @1% fee = $ 3,000
– Year 4 – $ 400,000 invested @1% fee = $ 4,000
– Year 5 – $ 500,000 invested @1% fee = $ 5,000
– Year 6 – $ 600,000 invested @1% fee = $ 6,000
– Year 7 – $ 700,000 invested @1% fee = $ 7,000
Total Compensation over seven years = $ 28,000
Note: This number assumes no profit or loss on the invested principal or any additional fees or expenses beyond the 1% management fee. Actual results would vary and change the overall fees paid to the registered investment advisor and third party investment companies. It’s also important to realize that most investment vehicles will have additional fees beyond the management fee paid to the advisor. Whether you are utilizing individual securities, exchange traded funds, index mutual funds, active mutual funds or separately managed accounts, it is fair to assume that the additional fees to one’s portfolio could eclipse 0.15% in any one year.
SOURCE: The above is taken from the book below:
Moriarty, John. Building Your Own Privatized Banking System: Educating Americans on The Purpose of Specially Designed Life Insurance Contracts (SDLIC)
Keep in mind that the 1% management fee does not stop after 7 years. It continues every year as long as the client still maintains the account with the Registered Investment Advisor. For the Insurance Agent, the commission usually stops after ten years.
I think I mentioned above that one of the great benefits of a PUA is the commission is much, much lower. But the data you showed indicate a commission of 55% on the base policy. Which is, as I said, between 50% and 110%.
The comparison to a 1% charging RIA is silly because # 1 I tell people not to do that either on any significant portion of money and # 2 the RIA is doing something every year for that money. He didn’t get that just for selling a policy years ago.
You said “50-110% of the first year’s premium”. You should specify 50-110% of BASE PREMIUM portion, and base premium in a properly structured WL for IBC is only 30% of the “first year’s premium” as shown in the calculation. The net effect is much less than 50-100% of the first year’s premium.
If it is properly structured. Which most are not. As I said when referring to most whole life policies:
“Most commonly, policies are structured to maximize the commission to the agent selling it. Cynical? Yes. But it’s the truth. The commission on a whole life insurance policy is 50-110% of the first year’s premium”
This is true. Most WL policies are NOT structured to do IB/BOY well. Read through the experiences many of my readers have had: https://www.whitecoatinvestor.com/forum/insurance/1728-inappropriate-whole-life-policy-of-the-week
Jim,
It is like you are talking about “fruit” and I am talking about “apple”.
Your first comment “Most commonly, policies are structured to maximize the commission to the agent selling it” – this would probably true for ALL general WL policies, not the one for IBC. Your replied comment “Most WL policies are NOT structured to do IB/BOY well” is correct.
Unfortunately your main article is about IBC policies, not general WL. Therefore, saying “most commonly, policies are structured to maximize the commission to the agent selling it” in a context for IBC policy is not correct. That’s why your statement of commission of 50-110% for policy should only apply to general WL policy, not IBC policy. Is that clear enough?
Just look at the fact, as in your article you pointed out the correct structured policy for IBC at least should have base premium and paid-up addition premium in the total annual premium. The correct structured policy for IBC would generate about 60-85% of cash value in the first year. So mathematically speaking, if a client puts in $100,000 premium (for both combined base and PUA premium), he will get about $70K in cash value. So his initial “cost” would be $30K to cover for death benefit, other expenses of the insurance company, and commission of the agent. How can the agent get up to 50% which is $50K in commission if the “initial cost” for the client is only $30K? It is impossible as the math does not play out. Show me a policy designed for IBC in which the agent earns 50% of commission of the first year premium!
I am sorry that all the people who posted in you post of “inappropriate-whole-life-policy-of the week” had all the WRONG polices for IBC purpose. Because of the general WL policies that they have, their cash values were very slow growth over a long period of time. It’s no wonder they are disappointed. Once again, those were NOT IBC policies. Do not confuse the two types. Those do not apply to the topic of your article where the focus is on policy for IBC.
As a doctor, we should be very specific in the analysis of the topic to not confuse the audience.
Yes, that particular line you zeroed in on was talking about fruit (all WL policies) and most of the post was talking about apples (WL policies structured properly for IB/BOY). I thought it was clear from the way I wrote it, but apparently not if it confused you.
Unfortunately, I have to be careful. If I just write something nice about WLI, a gazillion sleazy salesmen run out and sell a bunch of terrible policies inappropriately to doctors saying “Look at all the nice stuff WCI says about whole life” when I was talking about something very specific.
You can see why people get confused though. I mean, they’re all whole life policies. To make matters worse, I have met many docs who were sold policies that were not properly structured for IB/BOY and told they could do IB/BOY with them. That’s on the industry.
You should be a bit more clear. You’re lumping the bad in with the good.
A “properly structured” IBC policy has all of the benefits and none of the drawbacks you mentioned. You said that “most” are not structured correctly. How do you know that?
I would counter that the majority of agents don’t even know about high cash value, dividend paying, low commission products. But the ones who do provide a valuable service.
You think I’m wrong when I say most are not structured correcting then say that most agents don’t know about the right ones. Sounds like we’re in agreement.
1) “The comparison to a 1% charging RIA is silly because # 1 I tell people not to do that either on any significant portion of money”
– Majority of the general population who invest in the market use some source of Registered Investment Advisor. That’s how the Investment Firm can survive and makes tons of money. Only minority of people invest in low cost index fund by themselves without the help of RIA.
2) “the RIA is doing something every year for that money. He didn’t get that just for selling a policy years ago.”
– Whatever he does every year for that money does not guarantee an increase in value in every year. There are years that he does something and the client still loses the money in the account, and yet the RIA still earns that 1% of total account value. The insurance agent earns a relatively small commission (as in the example above $35,300 / $700,000 = 5% over 7 years, not 50% of total first year commission), and he designs a policy where the client’s cash value is guaranteed to increase every year without loss. In addition, the real agent for “properly structured policy for IBC” will continue to advise the client every year on the utilization strategy of the policy, how to borrow it, how to pay back the loan at what amount, etc… A reputable agent for IBC policy will continue to serve the client every year, and not asking for 1% of the total account value for commission!
Only a small minority of the investing public use an RIA
https://www.google.co.jp/amp/s/www.cnbc.com/amp/2019/11/11/99percent-of-americans-dont-use-a-financial-advisor-heres-why.html
1. You have no data to prove that and I bet it isn’t true. I bet the majority buy stocks on Robin Hood willy nilly or use a commissioned agent masquerading as an advisor.
2. That’s a bizarre, irrelevant argument. I wouldn’t want an advisor who “guaranteed positive returns” because he’s either a liar or he isn’t taking enough risk with my money.
There are no agents that are going to serve a 25 year old who buys a WL policy for the entire time he owns the policy. The agent will be retired or even dead by halfway through the life of the policy. Plus there is zero incentive to provide “service” other than selling more policies.
Both weak arguments, sorry.
Let’s see.
Option 1: WLI with the plan outlined. Total commission after 7 years-$35,300
Option 2: Pay an advisor 1% per year. Total fees to the advisor after 7 years- $28,000. (Plus expenses of the underlying investments)
Option 3: Portfolio with 0.05% expense ratios. Total costs over 7 years $1,400.
That is a really tough choice. Pay $35,300, $28,000 or $1,400. Clearly paying 25 times as much is the secret to financial success.
I’m not sure why you think universal life policies are some sort of improvement on whole life. In many ways, they’re worse.
Mainly greater transparency.
This can result in lower commissions. At least long ago when I was looking, some were available from direct writers without surrender charges at any point.
If kept for investment purposes, straightforward to reduce the insured amount and hence the mortality charges.
Otherwise, not much different from Whole life: expenses and mortality charges subtracted from premiums and the remainder invested in insurers general account. Returns depend on insurers’ results, which largely are driven by bond markets. Some insurers also have other long term investments but I don’t know whether there is a systematic difference between results for universal life vs WLI.
How is universal life worse than whole?
It becomes VERY different at the end of life as the cost of insurance rises. Most with universal policies don’t try to keep them with the original death benefit late into life because of that.
Interesting. The risk of death for the insurance company goes up with age for both universal and whole life.
Is the difference that the costs of insurance are actually higher for universal life policies? Or is it just that they show you this cost for universal but not for whole?
I had thought, could be wrong, that one could make universal act like whole by paying the same premium as a whole life policy would cost. This would be a lot of money and I can believe that most universal life buyers may pay less. But if you based your payment on the amount to guarantee that the policy will not lapse before maturity, then you should, I thought, have an experience very similar to whole life. Maybe better if the commissions are lower.
Keep in mind every policy is different, and that is especially true with a universal policy. The main benefit of universal policies is their flexibility. You can do lots of different things with them (index universal life, variable universal life, guaranteed universal life etc). But as a general rule, the cost of the life insurance component of a universal policy is very low in the beginning. So a large percentage of the premium goes to cash value…in the beginning. Perhaps this is why you feel they are “better”. But that cost rises such that more and more of the premium goes toward insurance costs. Eventually, especially if however the policy is invested has done poorly or you have borrowed a lot of money out of the policy, it can exceed the premium and start burning through the cash value. Once it burns through that, you either have to make large payments on the policy to keep it in force (with no cash value) or let it go (in which case any gains it produced over the years become fully taxable that year at ordinary income tax rates.) Commissions on a UL policy may or may not be lower than a WL policy. But as pointed out in the post, the best way to lower the commission (and thus increase return) on one of these policies is to minimize how much of it is the base policy and maximize how much is Paid Up Additions, which have a much lower rate of commission.
On the other hand, a whole life policy produces a few more guarantees. While not as flexible, the premiums are guaranteed and a certain death benefit/cash value is guaranteed. Primarily due to these guarantees, a whole life policy works better if your goal with the policy is to Bank on Yourself/Infinite Bank. Yes, whole life is more of a black box as far as the insurance costs, but that’s okay because of the guarantees.
Hope that helps.
great post Jim as always. Unfortunately when I got screwed buying whole life I had googled if buy WLI was a good idea and got multiple hits on this concept of Infinite Banking. I’m sure insurance companies use search engine optimization to sucker in people like me where google will only show the positive website for WLI. I’m not sure but likely also I was falling victim to confirmation bias back then as well. Is there anyway to get this post to be first on googles hit list?
also Jim, any thoughts on Buck Joffrey’s Wealth Velocity infinite banking product? Seems counterintuitive for Buck, who is about physician financial literacy, would be selling a whole life product.
About the comment on Buck Joffrey: he brings a lot of value from investments to a lot of physicians, dentists that follow his advices. He himself uses Infinite Banking policy for his own strategy. Why does Buck Joffrey, a physician himself, use this strategy? Why do many other physicians that follow advices of Buck Joffrey use this IBC strategy? Are Buck Joffrey and the rest of his physicians / dentists considered “suckers” to following the IBC strategy? It is not counterintuitive for Buck at all. He brings value to other physicians by introducing the IBC strategy, not just “selling a whole life product” for commission.
Have you considered that maybe there is truly a good merit to use IBC as a strategy to boost up other investment if the policy is designed appropriately?
Klemens Huynh, please do a comparison to the behavior of a rational investor.
Can you run your calculations for these options:
Investor puts $100,000/year into a portfolio of cap weighted index funds. Average expense ratio is 0.05% for the portfolio. No commissions. No financial planner.
Investor puts a small amount each year into a low load universal life policy. After the commission period has ended, investor begins to put in large amounts so that the total invested at the end of year 8 is the same as with the whole life or portfolio approach.
I suspect both will be better than WLI, by a wide margin and that the portfolio will be better than the universal life policy.
Interested to see how your figures turn out.
You can find my thoughts on infinite banking in this post. They would apply whether it is Buck or someone else pushing the product.
I’ve sat through two elaborate pitches on Infinite Banking about ten years ago. The first time was genuine interest; the second time was because nothing I heard the first time was remotely understandable and just wanted to confirm it was all marketing spin before walking away.
A bit fuzzy on the details, but I recall one of the aspects was direct depositing your paycheck into a special account. Maybe it was attached to the policy. The idea was you would drop the traditional checking account for bill paying and use this special account for all purchases throughout the month. For unclear reasons, the special account would magically perform better by somehow applying interest arbitrage. Like I said, not at all comprehensible. Your post didn’t mention this particular aspect though.
Is that a standard feature of Infinite Banking and what the hell are they talking about in the first place?
Thanks,
Chris
Are you sure you’re not thinking about using a HELOC instead of a checking account? Sometimes that is called mortgage acceleration or similar.
Yes, actually. That sounds right now that you mention the HELOC.
It doesn’t seem like that’s a key aspect of the plan then. Maybe it was tossed in a differentiating feature.
Note that the invested amount continuing to grow is a common feature to any loan. If you have money in a bank, a brokerage and an insurance policy and you borrow some money to invest elsewhere, the assets in all three accounts continue to grow. This happens if you borrow from the bank, from the broker, from the insurance company or from other entity. In none of those cases would the money you have invested suddenly stop paying whatever returns it had. Unless of course you borrow from an insurance policy that reduces the cash value on which it pays dividends while the loan is outstanding.
Even in that case, one would have to look at overall performance. At least in principle, such a company might pay higher dividends to those without loans, since it pays lower dividends on amounts on loan.
Thus, at least in principle, a mutual company that ultimately pays out in dividends amounts above costs, this could be a better deal for someone who did not take a loan.
I have no idea where this money actually goes between the two types of WLI, or between stock and mutual companies.
There is nothing special about borrowing from your WLI policy. You can borrow from other sources.
If you borrow from your life insurance policy and your investment fails, you still owe the money. Same as if you borrowed from anywhere else.
I bring up universal life since it is an alternative to whole life, at least in the past available at lower cost.
I am not advocating infinite banking with universal. By no means.
Just pointing out that it might be less bad than using whole. Have to look at the numbers.
You are right that the money continues to grow in a bank, a brokerage, or insurance company as you borrow the money against any of those 3 accounts for outside investment. However there are better loan features if it is borrowed from the life insurance company:
– It is a guarantee loan that you do not need to qualify, as compared to bank (or even brokerage account?). Therefore, the loan process is as simple as filling out 1 piece of paper telling the company how much you want to borrow and where to send it. Then, within 3-5 business days you will get that loan.
– There is no requirement for you to pay back the interest or principal at any time. So you have the flexibility of when you want to pay back. You do not have this with a bank’s loan or brokerage’s loan. This is a huge advantage for the borrower.
– For certain insurance companies, the interest rate MAY BE relatively lower, i.e. 5%, compared to that of bank or brokerage account…
So, if the loan features have more benefits, and the money continues to grow in the account regardless of the loan, why wouldn’t one want to put their saving money in the life insurance company, as compared to bank account or brokerage account? We are not even talking about the additional death benefit generated from that saving money in the insurance company that one will not have in bank or brokerage account.
The loan could also be worse. Lots of WL loans are at 8% and you can get a margin loan at less than 2% these days.
The margin loan is secured by the assets you have at the brokerage. No problems about qualifying.
As I posted above, margin loan rates can be MUCH lower than from the life insurance policy. 1-1.6% from Interactive Brokers.
You can leave your margin loan outstanding for the rest of your life. Just as with a loan from an insurance company, the estate will settle up with the broker at your death. Securities in the account can be sold at the stepped up basis, no capital gains taxes.
If you need life insurance on top of the investment, then you can buy term. It will be cheaper than the insurance buried inside a whole life policy.
When you no longer need life insurance, you can cancel the term policy without having to pay ordinary income taxes on all the gains in your brokerage account- as you would if you want to get out of the WLI policy.
None of these points indicate that using a whole life policy is better, or even as good, as putting that money into a 3-fund portfolio in a brokerage account. With this strategy, MUCH cheaper than WLI, as indicated above, you get:
*more growth
*a death benefit if you need one while not paying for it if you don’t need it
*ability to borrow at a much lower rate
*ability to move your brokerage account to another company anytime you want
*no early years of severely negative returns
*complete transparency of what fees you are paying and how much they are costing you.
If I wanted to borrow some money and a series of banks refused to issue the loan, I would at least contemplate whether I had just received some free financial consulting telling me that my business plan was a bad idea. I would take that into consideration before taking out my margin loan. I hope I would calm down and decide against the loan.
If the bank WOULD issue the loan, then I would get to shop around for the best terms, rather than being stuck with whatever one insurance company would offer.
If I were pursuing the 3-fund portfolio at a broker strategy, I could shop for whoever was charging the best margin rates when I wanted to borrow and move my assets there.
From what I understand, the 3-fund portfollio at a brokerage account, i.e. Interactive Broker, do not guarantee that your account value will “grow more” every year. There are years that you can even lose values if your fund do not perform well. (Please do not quote the “average return” is 8% or more… as everyone knows that the “average return” is totally different from the “actual return”). For the year when your value is lower as you lose money, you will potentially have “margin call”
Term insurance in the big picture is the most expensive insurance as almost 99% of term insurance never get paid out because most people do not die during that term and they will cancel the policy to lose all the paid premium without any more insurance. The insurance component of WL, as an added on benefit (technically it will be “free” insurance after 6-7 years of paying when cash value is more than total paid premium), is there permanently and it is guaranteed to be paid out to your beneficiary. The large death benefit from this permanent life insurance component of WL is multiple of your total premium, so the ROI is huge. Remember that the premium money is the one that you would have saved as saving, banking, loan benefit as discussed above anyway, so the death benefit is just an ADDITIONAL benefit on top of it.
Safety of the money in the brokerage account depends on how it is invested. One could invest largely in bonds and mimic the portfolio of an insurance company. The returns would be higher because the costs would be lower. Using your figures, as compared to a three fund, the cost difference would be $33,900 over 7 years FOR THE COMMISSION ALONE. Add in the other costs of the WLI policy and the brokerage account will be even farther ahead.
People cancel their term policies when they no longer need them. That is a valuable feature. When you don’t need it anymore, you get out. Nothing holding you to ongoing expenses for a death benefit you no longer need. When I stop driving I will stop paying for auto insurance. If I no longer own a home I will stop paying for homeowners insurance. Crazy to pay for insurance you don’t need. This is another good reason NOT to buy WLI.
If you do need a death benefit you buy term for as long as you need it. Cancel and save the costs once you no longer need it.
The ROI of the WLI is high if you die early. You know what you could have done to get an even higher ROI? Buy term with the same death benefit. Since the cost will be lower and the payment the same, the ROI will be much higher.
If you hold the WLI until life expectancy then the ROI is not nearly so good. As always, compare to buy term and invest the difference.
As an individual, you cannot invest the same way as large life insurance company in bonds and expect to get the same return. That’s the power of a large institution in investment.
Let’s not talk about theory. In real life, how many investors invests in Interactive Broker firm, will just invest in largely bonds to “mimic” the portfolio of an insurance, to guarantee that those investors will never lose money in any year? How many of them then borrow against that “bonds portfolio” with the margin loan at 1-1.6% interest rate as quoted by you, to invest outside or do whatever they want? Clearly the answer is next to ZERO!
You can talk to anyone who has a correctly designed WL policy for IBC purpose and many of them gladly practice the utilization strategy of the loan feature. None of them lose any of their money in the WLI policy.
There are already many arguments about “Buy terms and invest the difference” vs. Using correctly designed WLI for IBC. There’s no need for us to state here more. Those who see the benefit will reap it.
I have been reaping up the benefits of correctly designed WL policies to boost up all my other investments more than I would have been able to do without WL policies. Yes, at the same time, my children will be guaranteed to receive tens of millions of dollar in death benefit when I pass away, without me spending any extra money as I would have used the same money for investments without diverting it into insurance policies first. As a typical physician with typical salary, saving pattern, spending pattern, and investment pattern, I don’t think I would ever be able to pass on tens of millions of dollar to my children when I die, without this strategy. Are you able to do that? If yes, you must be very good, then please share your way.
Disagree that term is “most expensive” just because it isn’t used by many. Bad argument.
WL isn’t free at any point. The only way you can think it is would be to ignore the opportunity cost of that cash value. Bad argument.
The case is reasonable enough, it doesn’t have to be sold with poor arguments.
The guarantees are worth something. The lack of a margin call is worth something. The lack of need to qualify with a bank is worth something. The higher long term return on your savings is worth something. The death benefit is worth something.
These guarantees are worth something but not much. The insurance company is willing to issue guarantees because it is confident that it can do better on investing than needed to support the guaranteed amounts. It also feels it can use some of the money from policies that are lapsed or surrendered to support the promises made.
One could do something similar, minus the profit from policies that never pay out death benefits, by putting the premiums in a brokerage account, investing like an insurance company and borrowing from the assets accumulates there. Again, rock bottom costs.
You can even hold some in reserve for extreme bad events, just as an insurance company does. No magic.
Margin calls become a concern when your loan balance is large compared to your assets with the broker. Then a drop in the market can catch you. You can control this by
1. limiting your leverage.
And
2. Investing in low volatility issues, like Treasury notes and bills and short term TIPS.
If your accrued principal and interest on your insurance loan exceeds your cash value you hit the same problem. Except that it is not a margin call, it is a lapsed policy with a huge tax bill.
Death benefit is worth something but you can get it at lower cost through term, if you need it.
Since I don’t do risky investments on leverage, I don’t know how much a problem it is going through a bank. I do know that lots of risky investments fail, which is why banks are cautious. Your broker will lend to you based on the assets in your account and will not take a long time or apply underwriting standards to your business plan.
Given the number of banks that have failed in my lifetime while I have never come close to bankruptcy, maybe banks are less risk averse than they should be.
I am trying to respond to the advantages listed and I keep coming up with cheaper ways go do the same things. Including things that I would never do in the first place.
If there is something special about building up assets inside a policy and borrowing from it rather than borrowing from a bank or broker, I have not heard what it is.
About the only value I see is if you are so concerned about asset protection that the protection you get in your state is worth the high cost of WLI. If you habitually make risky investments and sign personal guarantees for loans, then having some money protected might be worth the very high cost. But this works only if you do not take the loans from your policy. The asset protection does not apply to money you owe the insurance policy on the loan from that policy.
The guarantees are worth different amounts to different people. To you and I, not that much. To Klemens, significantly more.
I think I explained above in the original post “what is special” about doing this. Are there other ways to do similar things? Yes. But they’re not the same thing. If you see little value in the concept, then don’t do it.
The main value of “banking on yourself” is to earn a little more interest on a very safe investment in the long run while getting a death benefit and in many states some asset protection. That’s it. It’s not worth it to me but I can certainly understand why it would be to some others.
In all the posts, I’m not seeing much about what is a particular person’s risk tolerance, and what are their goals. Generalizing or taking averages don’t work to illustrate sufficiently (for me).
On scale of 1-10:
1. The ultimate “tortoise”, somebody who does not want to LOSE a penny of principal ever, and is willing to NEVER gain more than a certain conservative amount. Some people just call this person a “loser” and they are certainly correct, in the sense this particular tortoise truly closes the door on many opportunities;
vs
10. The ultimate “rabbit”, a person who wants to take advantage of the tremendous upside potentials of all kinds of opportunities, even willing to risk and lose ALL and start over, in the quest to max out.
To the above extreme 1-10 example, add complexities of being a key-man, breadwinner or other essential income piece of a puzzle… all kinds of other stipulations about a specific scenario.
There’s plenty of in-between people, of course this is oversimplifying, and strategies to hedge bets, etc, Factoring in taxes always appears to be important to me, and sometimes seem to be omitted from arguments, like this: I gained 10% last year, bla bla bla amount. I would always like to see an after-tax figure if possible.
Averages and talking about “most people” aren’t an argument. From the posts I see, I’m guessing there are more rabbits posting than tortoises – sorry – I know it’s not that simple. And I agree with one thing, maybe some of the tortoises need to learn from rabbits, and vice versa. And that seems to me as important as clarifying whether we are talking about “an apple”, or “fruit”.
Just asking, because if a risk-averse person like “ultimate rabbit” wanted to have some kind of safe-no-matter-what plan, regardless, then, a CORRECTLY STRUCTURED BOY-type thing would work. Is that right?
It seems to be clearly enough stated throughout these posts that there are a lot of potentials to NOT getting the BOY-type thing structured correctly, so Caveat Emptor applies to the dear tortoises and would be one of the single most important points to NOT miss. No need to state again, these policies/plans are hardly ever done right, got that!
SORRY, in this sentence, I meant to say: a risk-averse person like “ultimate TORTOISE”.
I like your TORTOISE and RABBIT analogy. Why don’t we take the best of both worlds? In the story of course you cannot, but for IBC policy this is exactly what you can get, best of both worlds.
– TORTOISE: receiving 3-5% tax-free dividend and interest, compounded, annually to death for the cash value. This is much better compared with regular saving account of that money or doing nothing with that money.
– RABBIT: using that IBC cash value as collateral to access the insurance company’s money to invest in whatever vehicles to earn whatever you think you can do best 8%, 12%, 18%, 20%, etc… There is a simple interest cost of this access of 5%, but the compounded divident and interest earned within the cash value of 3-5% would beat this simple interest cost.
Combining TORTOISE and RABBIT approach is the essential strategy for IBC strategy with the policy. It is not wise to just be ONE or THE OTHER. It is wise to be BOTH at the same time.
I’m having a hard time not rolling my eyes. But hey, if you’re happy with your policy, enjoy.
Valid observation. It might be noted also that both tortoise and hare style investors could equally value a Bank On Yourself (BOY) policy for it’s diversification.
A tortoise would primarily benefit from the steady growth of their savings and eventually policy dividends in a tax advantaged format.
Meanwhile, hares like myself gain value from having stable assets to create a forced savings plan that allows them to increasingly be able to self capitalize new opportunities in a lower risk way. Using policy loans they can tap risky growth opportunities and while retaining a healthy policy and doubling up their cash work rate through policy dividends.
That’s not much of an argument. Just because your risk tolerance is greater than a banker’s doesn’t mean you shouldn’t go forward with the business. Plus banks can be kind of slow. Look at all the real estate investors who go to hard money lenders/private lenders instead of a bank for a 6-12 month loan.
Not at all clear that insurance companies are more successful bond investors than the market. Do you know of data to support that claim? If an individual did want someone else to run the bond portfolio they can buy a bond index fund and pay 0.035% of assets. Way less than the cost of the insurance policy.
Plenty of people invest in brokerage accounts and don’t find a need to borrow. Those who want to use leverage borrow from their brokers and do so. I don’t know what proportion of them use IB specifically, but that firm courts those who want the service by offering low rates. I assume IB gets a relatively higher share of those who use leverage.
According to FINRA, the total margin outstanding across the US varies between $550B and $650B. In other words “how much money is lent via margin? Hundreds of billions”. Way more than next to zero.
So far, none of these putative advantages of WLI-based leveraged investing have held up to a look. If there are some features that make this approach valuable, they have not been described on here.
I speak from my own experience. The numbers and the math calculation from my own policies and strategy do not lie to me. I just reap the benefits as stated. Like I said, those who see the benefit will reap it.
If you have done well, congratulations. Can you explain why you could not have accumulated the same amount of money, borrowed at a lower cost, saved the expenses of the WLI, bought term insurance if you needed it, and ended up in the same place? Or better off?
How much money did you lose as compared to a brokerage account, conservatively invested, with no huge commission on the WLI? What interest rate have you been paying on the loans? Did you shop for margin rates at brokers? You seemed unaware of how low they are..
I suppose the reason I am fixated on this is that I see it as just another pitch to sell extremely expensive, high commission life insurance.
I don’t get the thinking that both highly values guaranteed returns on very low yield investments and intends to use leverage to pursue high risk investments that a bank would not fund. I can see wanting one or the other but not both. If you are risk averse, then don’t leverage yourself into risky bets. If you love risk, then don’t go paying high fees for guarantees.
Clearly, I find this interesting. I am just not sure whether the people who love it have really compared it to other ways to access funds for Investing.
Since there was so much enthusiasm from one poster, I was hoping to see some good analysis, with figures for the alternative.
Anyway, thought- provoking article.
Here is an illustration of one of my many policies and how I used it:
– I opened this policy in 6/2016 with Penn Mutual Life Insurance Company, and I have put in total $112,935 for 5 years of premium so far. As of today, my current cash value is $108,176, and my permanent death benefit is $785,574. One thing to know is that the dividend is applied to the CV at the end-of-year on anniversary date, so my current CV does not take into account of the dividend for the year 5 yet (until 6/2021). At initial look, one may say that I “lost” $4,758 ($112,935-$108,176). I view it as “temporarily I am not able to access this $4,758 yet.”. In addition, this $4,758 at least at the moment gives my family a permanent death benefit of $785,574. By the way, is $4,758 over $112,935 for the past 4.5 years considered a HUGE COMMISSION on my WLI? You probably can tell the answer.
– I collateral my CV with Investor Bank for a business line of credit (LOC) with the interest only loan at 3% rate. This is much better than the 5% loan rate directly from Penn Mutual.
– Let’s say just for 1 year, I took out $100,000 from this LOC and invested in AHP Fund (Ahpfund.com) and earned 12% return, $12,000. This $12,000 is reported in my K-1 as tax free due to the nature of real estate investment. I paid $3,000 interest cost of LOC. This $3,000 is also tax deductible as it is a business loan. With 40% tax saving (federal + CA state tax) my saving is $1,200. So, my net “after – cost, after – tax or tax-free” earning is $10,200. Of course, as with any collateral loan, the account value in original place is not affected as we already discussed above. So my CV in WLI is not affected at all from this outside investment.
– Lot of people invested in real real estate can say that it is not unusual to earn in the upward of 15-18% or more return, tax-free!
– This initial cost $4,758 will become zero after year 6 as my cash value will outgrow my cumulative premium after year 6.
– For me, it is a peace of mind to know the following: 1) my saving money $112, 935 is guaranteed to grow up in a compound fashion every year without lost, 2) my outside investment from collateral utilization of the CV generates large tax-free earning, 3) my family will be guaranteed a permanent large and growing death benefit upon my death, without “costing” me any more money after year 6. I know for sure that I have NOT lost any of my money using this strategy so far!
– I understand that it’s different to compare to investing in the market for the past 5 years as we have a good bull market so far. Imagine in a year of market loss, especially at later year when the account value is high, the account value will sustain a loss in that year. You are probably aware of the importance of sequence of return when investing in the market.
– I am not the only one who takes advantage of utilization strategy of the WLI for investments. Many people who has a appropriately designed policy for IBC have done similar ways as I did. I just don’t know if there are a lot of people who have done the margin loan strategy as you stated.
– Just curious, have you done anything similar to the strategy you outlined: put money in broker account using 3 fund portfolio, borrow the loan with the margin interest of 1-1.6%, and invest that money in outside investment? How easy was it? Did you have a peace of mind knowing that you will not lose money in the broker account at all?
Interesting trick to lower the interest rate. I like that.
While not unusual to earn 15-18%, I certainly would not count on that sort of a return. I also would not characterize it as “tax-free.” I think that’s a bit dishonest. Sure, your income can be sheltered by depreciation…for a while. But that will eventually be recaptured unless you exchange (in which case the next investment will not be able to be depreciated as much as otherwise) and will eventually run out if you don’t sell/exchange.
If you have “peace of mind that you will not lose money” while seeking out 15-18% returns in real estate I want to introduce you to my friend 2008. 🙂 I say that jokingly, because I have similar investments and hope they will also have similar returns, but real estate is far from providing any sort of guaranteed positive return. The fact that you funded it with a WL policy instead of your savings account should not provide you any sort of additional peace of mind.
– “Tax-free” earning from real estate investment: savvy RE investor understands this well as you stated. The depreciation of RE creates “paper loss” to offset the real income. You can do 1031 exchange for a “larger” project to continue this road of depreciation. Another way is that you continue to invest in a different projects and the new depreciation (even bonus depreciation) of the the new projects will offset the capital gain of ultimate selling of the old projects. You don’t just invest in 1 deal and wait to be recaptured back at sell. Ultimately, you will die and still own these investment, so at that time the step-up basis will help to offset on capital gain without tax. The fact that you have access to the earning without paying tax at present time is huge (it is totally different than deferred tax payment of those 401K’s retirement where you do not have access to use it until retirement time)
Do you think Robert Kiyosaki, Ken Mcelroy, or Grant Cardone, or more RE gurus will just defer all their RE tax “for a while” and will pay a huge tax at the end?
– 15-18% ROI of RE that I mentioned was just an example. Of course it is not guaranteed. However it is at least a benchmark to look for in RE syndication deals.
– “peace of mind that you will not lose money”: I referred to the money that I save in the CV of WL insurance policy, as compared to if I were to put that money in brokerage account initially. Of course, any outside investment of RE has risks involved like any other investments. I never meant RE investment will provide any sort of guaranteed positive return. If I were to take risk to make investment with my money in anything, I would rather had that money safely earning 3-5% compound interest for the rest of my life first in WLI, then leverage against it for the outside investment. This is exactly what I did as I showed in my illustration. That’s what “peace of mind” referring to.
– Saving my money/income in the WLI essentially create an emergency as well as opportunity fund to use anytime for emergency or opportunity for any investment.
– Bonus benefit: the way I collateral my CV with a third party bank, ie. Investor Bank, I essentially created a 100% asset protection for all my income/money that I saved in WLI. The Investor Bank has first right assignment, just like a first lien on your mortgage. This is in regardless of your state’s asset protection of the CV, which in my state of California is very poor.
…crickets. That’s what you get for casting pearls before swine.
Healthy skepticism is a good thing, but it can go too far, as it has with many in this discussion.
When the market takes a downturn, cash is king, and assets are cheap, we will be reaping the benefits.
I agree you’re a bit fixated on this. 🙂
I also agree with you that this is a pitch used to sell extremely expensive, high commission life insurance. It makes me very mad to see whole life insurance sold to someone with $250K in student loans at 8% or to someone who isn’t maxing out their retirement accounts or as a “retirement plan.” I have a long list of readers who have had that happen to them, including me. Here are some examples: https://www.whitecoatinvestor.com/forum/insurance/1728-inappropriate-whole-life-policy-of-the-week (link down today while forum upgrades).
However, you seem to be missing the point of what we are discussing today. The point is to earn a little more money on your cash. So instead of earning 0.6% at Ally Bank, you earn 3-4% maybe over the long run. You also get a death benefit in the event of an untimely event (that has at least some value) and in many states a bit of asset protection on that money (that has at least some value.) The costs include a negative return for perhaps 5 years on that money, some additional complexity in your life, and the need to qualify for a life insurance policy on your or someone you have a direct financial interest in. It’s not to save for retirement. It’s not to make a great investment. It’s not about leverage. The investment and any possible leverage are completely separate. This is about where you go to get the needed cash. Do you go to your bank account (which doesn’t require you to qualify for nor buy a life insurance policy, pays about 0.6% today, and provides no death benefit or asset protection) or do you go to your whole life policy (which does require you to qualify for and buy a life insurance policy, has negative returns for 5ish years and 3-4% returns in the long run, provides a useful death benefit in the event of your untimely death, and may have some asset protection)? When I phrase it that way, it doesn’t sound so bad does it?
I agree that leveraged risky investments, when they work out well, can work out great.
Leverage to put money into risky investments is not my thing, but I recognize that there are lots of people who do this, with real estate, stocks, private businesses, etc.
My question is whether a life insurance policy is the optimal place to store up some cash and from which to borrow.
The amounts lost to commissions and early years low cash value are not “temporary”. They compound. Someone who had saved that money at the front and compounded at the same rate would have more money in cash now and the difference will continue to grow. It is like paying a high commission on a stock trade or buying a loaded mutual fund.
It is certainly possible for the returns on the leveraged investment to be high enough that the entire project, including the losses on the life insurance policy has a positive return. But one would still be behind a strategy that did not include these losses at all. The returns of the leveraged investment would be the same, no matter where one got the money to invest. If the interest rate on the loan were lower, then the net cost of the borrowing would also be lower, again come out ahead.
As noted, one can get margin loans at rates well below 3%. Using margin loans, one can shop around for whoever has the best rate at the time one wants to borrow. No need to be stuck with an account at a broker one might have opened years ago.
The life insurance issue has to be thought of separately. In the years when I was paying for life insurance, I would periodically shop for new term policies. During that time, rates kept going down. Although each time I was a few years older, I got lower costs per dollar of death benefit. This made sense because the commissions were low enough that they did not wipe out rate advantages. If I had been paying big commissions each time I changed policies and starting a new surrender period, it would not have worked. Consequently, I was not stuck with the same policy or the same insurance company. When I no longer needed life insurance, I dropped it. No need to keep the policy going to avoid a big tax hit. With whole life, you are stuck.
If one needs life insurance, then buying term is much cheaper. If you need it for the rest of your life (not many people need this), you could be better off saving that upfront loss on the WLI, saving that money, and using it to pay the high premiums late in life. This is essentially what one does with WLI- the insurance company uses the high early premiums to pay the death benefits later, if someone keeps the policy. But dropping unneeded life insurance later on is a much better move in terms of expected present value.
If one wants to save up money, invest it, then use it for collateral to support loans for business ventures, great. It is still not clear that paying the costs of WLI is the best way to do this. There are alternatives that are cheaper, more flexible and easier to exit when one wants.
Wishing you the best of luck with your future deals!
You’re fixating on the wrong stuff here. When we’re talking about BOY/IB, it isn’t a discussion about life insurance or about borrowing. What you use the money for is also not part of the discussion either, whether that is a leveraged real estate investment or a wakeboat.
It’s all about the banking aspect. In exchange for dealing with the hassle of a life insurance policy and poor returns for 5ish years, you get a slightly higher return on your money in the long run, a death benefit (could save you a little if you have a term life insurance need), and maybe some asset protection.
I agree if you need insurance, term is a cheaper and almost always better way to do it.
I agree if you need to borrow money, there are often better ways to do it than to borrow against a direct recognition policy.
I agree that one needs to be careful with the use of leverage.
But that’s not what we’re talking about here. All we’re talking about here is if someone is going to hold any significant amount of cash, is it worth it to them to deal with some hassles in order to get a slightly higher return on it in the long run? Now if you still have 8% student loans or an unpaid mortgage or haven’t maxed out your retirement accounts or whatever you probably shouldn’t have a significant amount of cash, whether it is in the bank or in a whole life policy. You need to be past all that before entertaining this idea.
My point with this post is that this idea (BOY/IB) is neither stupid nor magical and too many people think it is one or the other.
I really like this reply. Specifically the part about IB being neither stupid nor magical.
My appeal to it is that it alleviates many of the issues that business owners face. Mainly the jumping through hopes that is required to obtain financing for whatever they want to obtain in their life. Once you become a business owner your ability to finance projects/real estate/anything really become exceedingly difficult.
Real Estate, for example, typically requires a 5% down payment (In Canada at least), but when you become a business owner you typically require 20-30% for anything investment related. Most owners simply put their cash in an account and let it accumulate but unfortunately this doesn’t provide any significant return. WL can get you a 3-4% tax-free/deferred return after yr 4-6 all the while being usable in the meantime.
Beauty of these things is that after yr 8-9 you can offset the policy so that it survives on it’s own forever, without another premium payment while still growing at an attractive rate along with an ever-increasing death benefit. All while being accessible in a largely tax-free/deferred basis.
The risk really only exists in the first 4-6 years. When comparing apples to apples, my assumption is that the risk taken investing in the market and in a WL in the first 4-6 yrs is very comparable. However, after that the WL is significantly less risky.
I think you’re missing the point. It’s not about borrowing money. You’re just getting your own money out of an insurance policy instead of a bank account.
The risk of the market and WL is never comparable. Besides, you have a guaranteed loss in a WL policy in the first 5+ years.
I don’t disagree with you that you are borrowing against your own money. But you are certainly getting a better return inside the policy than you would be in a cash or cash equivalent bank product.
In the long run, that’s right. That’s your trade-off–worse returns in the short run and some additional hassle in exchange for better returns in the long run (and an additional death benefit in the event of an early death). It’s not about “borrowing” though because it’s your money whether it goes into a policy or a bank account.
Wow! What a wealth of information you have in the comments of these BOY/WL articles! I was trying to stay out of it, because I’m just here to learn, but wanted to thank you. Not just for writing about these topics, but for the SEVEN PAGES of comments on your older article! And for this updated article. As someone who is trying to figure out where these instruments may or may not fit into my family’s financial plan, it has been great to find such a wide range of input from different parties, unfiltered, and in one place. God bless you for your [many, many] thoughtful replies, and for your patience. =)
The most challenging thing here seems to be justification of this over other financial instruments. And comparisons to put things into perspective. Which can be nearly impossible given the different ways to structure and use these policies, and the different goals/needs/expectations of each individual. Ultimately, like someone said, the valuation of this strategy can be very different to each person depending on how their policy is structured and how they intend to use it.
This article was great! As are all the comments. Thank you so much.
As a ‘newbie’ to the insurance industry, I am very interested in the investment benefits over the death benefit of any product. I have a generally good idea of the finance industry (or so I thought) but have been overwhelmed with agents trying to push this concept in addition to UL’s. I’m constantly looking for more information so I don’t come across that way with my own clients. I honestly want to show people how to build a safety net for themselves, and their families.
I cannot thank you all enough for the transparent discussion and perspectives of each strategy. This certainly brings an unbiased perspective to my internal conversation.
Your comments reveal that we each have our own ‘best’ way of keeping and growing our wealth, based on each individuals priorities. It’s refreshing to be able to compare and contrast my own strategy with no pressure.
Thank you!
I started looking into IBC few month back, and just finished reading Nelson Nash “Becoming Your Own Banker”. It’s a great read and concept is intriguing if you keep an open mind and try to follow the logic. It’s not as intuitive as one thinks looking at it superficially. For example, in your post you mentioned if you earn 5% interest in WL policy, and pay 5% interest on a loan to take out on the cash value, it is a wash, as 5% – 5% =0! Right? Not so! The interest you earn in a WL policy is compounded annually, whereas the interest you pay on the loan is simple interest. So on $100,000, earning 5% compounded annually for 5 years, interest earned is $27,629. How much interest is paid on $100,000, borrowed at 5% (simple interest), for 5 years? (Hint, it’s NOT $27,629!). It’s actually $13,227. That’s just over 5 yrs, imagine if it’s over a few decades what the difference is. In fact if you had paid 10% simple interest over 5 yrs to borrow the same $100k, the interest you owe is….$27,482! So compounded interest earned at 5% outgrows the amount owed borrowing at 10% simple interest on the same amount over same period.
Ummm…you need to do the math again on the interest. In your calculation, you aren’t borrowing all of the $100K for all 5 years. Of course if you pay half of it back in the first couple of years you’re not going to owe as much in interest. If you actually borrow all $100K for 5 years and pay back the interest due each year ($5K), you’ll pay $25K in interest. If you borrow that $5K a year too in order to pay the interest….guess how much you’ll pay back. That’s right…$27,629. Compound interest works both ways.
In Nash’s book (have you read it?)… he states that in order for IBC to work, YOU play the banker in the literal sense of the word. If the bank charges you 5% interest to borrow, you charge yourself either the same interest rate, or slightly more, and pay it back to your policy. You’re fudging the numbers to make 5% borrowed work un-realistically. In the real world, I guess interest-only loans would let you borrow 100K at 5% each year and charge $5k. Even if that were so, your initial statement of 5% interest earned by your policy minus 5% interest charged to borrow from the cash value = 0 (a wash) is still false, as compound interest earned at 5% ($27,629) is still MORE than what you pay in your version of paying $5K per year x 5 year = $25K. $27,629 earned > $25K owed (your version). Still not a wash!
So the concept to grasp is you earn compound interest in your policy. You borrow at simple interest FROM your policy by following the strict sense of a loan, in that you pay back either interest only or interest+ some principle as in the real world. In other word, compound interest doesn’t work “in reverse” when you borrow a loan because you need to return the loan in scheduled payment. To think other wise is to live in an alternative universe. If you can’t get past this concept, then how to make IBC work for you would be hopeless.
That’s how you “Bank on Yourself”. No cheating allowed, else you will literally go … Bankrupt!
Nash’s book is primarily marketing, a lot like your posts. But if you think there’s some free lunch there, go buy lots of whole life insurance and get rich. It’s your money and your life.
OK, great way to make an argument. I’m a marketer. Nash is a marketer. Actually Nash points out there is no free lunch. And the “magical” part of IBC is this concept of compound interest earned vs simple interest borrowed, that gives you the spread to always stay ahead of the game. WL policy is used as a tax-free savings vehicle, and one can leverage the cash value via interest free loans (ala the spread of compound interest vs simple interest). The other concept is cash flow, ala Robert Kiyosaki. So if you combine IBC with say syndication real estate w/ passive income, and cash flow your preferred returns back into your policy as you get them, the system maintains and feeds itself. It’s not going to work for everyone, even Nash points it out. You need the knowledge and discipline to understand the micro and marco-economics of your IBC system. Nash actually suggest you can “cheat” the system to your benefit and get better returns if you pay back a little more than what you borrow/owe, if you have cash just sitting around, being careful not to MEC the system.
Back to my original point: 5% interest earned compounded annually outgrows 5% simple interest loan borrowed (and re-paid on schedule as in real-world bank loans). You cannot dispute or disprove that.
I leave with a Nash quote (paraphrase): If you understand what’s really happening, you’ll know what to do.
You’re clearly a Nash/Kiyosaki disciple. That doesn’t reflect well on you.
At any rate, I agree that if one understands what’s really happening, they’ll know what to do. 🙂
FYI, literally “discovered” Kiyosaki and Nash in the last 8 months because of the pandemic gave me time to rethink about my finances. I read 3 of their books. Does that qualify me as a disciple? I will gladly take that as a complement, that you think so highly of someone you barely know or met and only read 3 books to be considered your equal!
Now back to my original point (sorry I’m a bit OCD on the numbers and the math). If your thesis on the cons of IBC is based on flawed math of compounded 5% earned zeros out 5% simple interest borrowed, and you fail to even acknowledge it, then how credible is the entire thesis? You gloss over this small point that you clearly got wrong, but my point is this small point (compounding interest) is a vital component of IBC.
And talk about marketing, your auto reply email to commenters is full of marketing! I have no problems with that, just saying!
I already explained the math to you. Interest that is paid back does not compound. Principal that is paid back prior to the end of the term does not generate interest. That accounts for the lion’s share of the figures you gave. Beyond that, the difference between compound interest and simple interest over short time periods is trivial.
I have no idea why you would equate being called a “Nash or Kiyosaki Disciple” with being called “an equal.” In most knowledgeable financial circles, being called a discipline of charlatans would be considered an insult.
I would suggest reading through something like this prior to wearing “Kiyosaki Disciple” as a badge of honor:
https://johntreed.com/blogs/john-t-reed-s-real-estate-investment-blog/61651011-john-t-reeds-analysis-of-robert-t-kiyosakis-book-rich-dad-poor-dad-part-1
[Ad hominem attack deleted. If your main purpose of posting is to troll me, we both have better things to do.]
The more I read these comment sections, the more I think you should add a check box to comments that says something like, “I do NOT have a financial interest in the promotion or sale of insurance-based investment products (eg. permanent life insurance)” which is unchecked by default. Checking the box would not prevent the comment, but would flag it with a note, letting readers know the poster has a conflict of interest. I hope this doesn’t come across as pretentious and telling you how to run your blog, but I get frustrated and very suspicious by some of the WL-promoting comments, like from posters whose name begins with “Dr.”, which seem to go out of their way to appear as an inquisitive consumer exploring the amazing benefits of insurance-based investing. Bogleheads has had problems with this too. Yeah, people can lie, but that would just add another, balder, layer of dishonesty.
Pretty amazing how nearly all promoters of these products sell them for a living eh?
So much to unpack here. I do practice IBC personally, and to me the Infinite Banking Concept is a fundamental mindset change about how to manage the banking function in your life. The average person in the United States is paying over 30% of every dollar towards interest. When are people going to grasp that the real problem isn’t the interest rate, but the VOLUME of interest? Coupled with the fact that most cars are traded in before they are paid off, and most mortgages are off the books around 5 years or so, the volume of interest paid is PERPETUAL. The IBC policy I have is not an investment, it is a place to store Capital. But I have borrowed from the policy to make investments and paid back the loan with the proceeds. And guess what? My policy just keeps on growing every year like clockwork.
Over the years I was one of those people who was paying over 30% of every dollar going out to interest expense – yet comparing with my buddies what “high” rate of return we were getting on the little dribble of “investments” we had. I finally realized how absurd that really was. Everybody wants to talk about “rate of return”! Look at the bigger picture and think this through more diligently – and I believe you may understand why Nelson Nash made this important discovery. The last thing people who truly understand IBC would call this an investment. Rather, this is a place to store capital and build a warehouse of money that you can access to finance purchases you would otherwise make – but now you are in control – and you are the bank. Can you borrow against the policy to make investments? Absolutely. When I make an investment choice, I am doing so because I know something about the investment. The average “Joe” on the street putting money in their 401(k) is not investing – they’re guessing at best. When over 90% of mutual funds out there don’t even outpace the S&P 500; we’re calling that investing???
This is just my own personal experience. #1 – It’s about the banking function in my life. You finance every purchase you make. Either by using OPM, or giving up what you could have earned on the cash you gave up. I decided to start becoming the bank. #2 – This isn’t an investment, it is capital accumulation. IBC is a long-term process. #3 – Taxes are the greatest destroyer of wealth in this country. While I’m building a warehouse of capital, I don’t need Uncle Sam dipping their greedy hands in it.
it does cost to build that warehouse of capital though because of the MEC limit
Andrew that’s just a construct that affects Policy Design.
That was like an hour long sales presentation all wedged into one comment.
If 30% of every dollar you make is going to interest, you are doing something very, very wrong with your personal finances.
Also, your reasoning that a 401(k)/mutual fund is a bad investment because most funds can’t beat the S&P 500 is bizarre. Want to match the S&P 500? Buy an S&P 500 index fund. It’s available in nearly every 401(k) these days.
I will concede that I tried to pack too much into that comment. But I didn’t say 30% of every dollar the average person makes is going to interest. Statistics show that 30% of what is paid toward debt payments is going toward interest expense. I realize I didn’t clarify that very well. It comes out to about 2.5-3.0% on car loans, 18-24% on mortgages and the rest filled in with credit cards, boat payments and the like.
Agreed that the average person putting money in a 401(k) would be best served to just find an S&P 500 index fund and get their company match – let it ride. The investment portfolio in the 401(k) plan my company offers doesn’t have that type of fund, but there is a Roth option which is helpful. Can you imagine the tax rates in the future when the government realizes we can’t service the debt??? Look out tax qualified plans!
I see, you’re adding up all the interest for multiple years. In times of higher interest rates, that number could be even higher.
There’s no reason the government would be more likely to tax Roth accounts than cash value life insurance policy cash values.
No I actually agree with you there. I was speaking on the fact they would tax anything that wasn’t a Roth type account. Which is why I personally have a Roth 401(k). I’d rather pay taxes on the seed than the harvest. Thanks for the reply.
For sure if you really think taxes are going up dramatically, the solution is Roth contributions/conversions. More on the Roth vs tax deferred decision here:
https://www.whitecoatinvestor.com/should-you-make-roth-or-traditional-401k-contributions/
It’s bizarre vapid unclear and very long.
It’s not just dividends that are compounding. The policy has a guaranteed growth rate that is separate from the non-guaranteed dividend. Even the non-dividend growth CAN be HIGHER than the guaranteed rate. And your loan interest is contributing to your dividend.
BTW, I am NOT a life insurance agent. I make NOTHING from the sale of life insurance. Can you say the same?
Yes, I can say the same. I’m a doc and a blogger, not an insurance agent. I could certainly make more money referring people to whole life insurance salesmen than telling them not to buy it.
The guaranteed return on even a good whole life policy is only about 2% a year if you hold it for 50 years. Not exactly something to be happy about. But if that makes you happy, it’s your life and your policy.
You’re right about the dividends though. The guaranteed increase comes without using the dividends to purchase paid up additions. The non-guaranteed increase comes from using the dividends since the dividends aren’t guaranteed. More info here: https://theinsuranceproblog.com/life-insurance-dividend-options/
So you don’t receive any commissions from your affiliate agreements selling TERM life insurance on your site? No conflict of interest there? I didn’t say you were an insurance salesman, though you kind of are.
The guaranteed growth in cash value is more than 2% and has nothing to do with dividends in any way, including paid up additions. The guaranteed growth is growth that MUST happen in order to pay the death benefit. You don’t understand IBC. You don’t even understand Whole Life.
I don’t have any affiliate agreements with anyone selling Term life insurance. Thanks for playing.
You sure you’re not an agent? You’re picking our words very carefully that someone who isn’t astute will miss what you’re saying. I agree the guaranteed growth in cash value is more than 2%, but the guaranteed return is not. More info here:
https://www.whitecoatinvestor.com/thoughts-on-permanent-life-insurance-returns/
I’m glad you’re happy with your policy but your ad hominem attacks are getting old. Nobody is making you read my writing. Nobody is making you leave comments. But if you keep up the ad hominem garbage, you’re going to find that you won’t be leaving comments here.
I’m pretty sure I would know if I were an insurance agent.
You may not receive affiliate income, but you site is full of ads for term life insurance. And I’m pretty sure they’re not free ads. So you DO receive indirect payment from the sale of term life insurance.
I am not attacking you or even your ideas. Since you have refused to answer my question about whether you have read Nelson Nash’s book, I have to assume you have not. I wholeheartedly encourage you to do so if you truly wish to understand Mr. Nash’s concept. It is very misunderstood and I am just trying to help educate.
There is really no need for folks like you and Dave Ramsey to be against this. It is NOT a scam (if practiced according to Mr. Nash’s concept, and if not, then I’M against whatever those people are pushing!) And it’s not a binary either/or relationship between IBC and other financial tools that you promote. IBC is NOT an investment. It’s is a concept for using dividend paying whole life insurance from a mutual company as a “bank” to save and build capital to use for financing other activities in your life, SUCH AS investing in stocks, bonds, and mutual funds while also allowing you to pass on wealth to your family and/or other loved ones or charities tax free through the death benefit. As far as the need for insurance in younger years, Mr. Nash would say that if the death benefit from one’s IBC policy(ies) is insufficient for those needs then additional term life insurance SHOULD be purchased to cover those responsibilities. (And he would say that you should PAY for that term insurance out of your IBC bank!)
I am honesty not attacking you and would like to continue this CONVERSATION. I’d rather not see it as a DEBATE.
Never said it was a scam nor an investment. The marketing feels like a scam, but the idea by itself when done properly is simply trading poor short term returns and hassle for better long term returns on your cash.
I said my piece on IBC above in the post. Wish I had time to have a conversation with all 2-300,000 people who come by this site every month, but alas, I do not.
I’m an average Joe. I bought term life insurance. Maybe he made commissions on it but at least I knew WTF I was buying.
I did not buy a life insurance policy because of all the very clearly articulated reasons on this page.
I will sum them up as:
– Unless you do everything right it’s a scam that’s more about getting commissions out of the rube than it is actually selling helpful product.
– And secondly if you do everything right and get the Stars aligned perfectly, you’ll earn 2%.
Here’s the real truth, it’s a scam and ought to be illegal. Like mattress salesman and car dealers. Period.
[profanity removed]
Thank you for the level headed analysis and your patience in the comments. This topic is not well understood by most, so it is interesting to see your backhanded endorsement of the banking strategy given your generally negative view on whole life.
I am actually awaiting approval on my first policy for banking purposes. Will be using the policy savings guarantees to offset risk in the rest of my portfolio (trade high risk options) and smooth out overall volatility of returns, as well as financing the down payment for my first house in 2022.
It will serve as a much more stable source of funds than my current opportunity fund (pulling 12-18 month interest free balance transfers from my credit lines and paying them off before the expiration).
It also creates a nice forced savings system not unlike a mortgage, without the interest costs that come with mortgages.
I noted you mentioning that financing through whole life is simply utilizing ones own money, which is true to the extent that you did pay in the money, however when borrowing from any source, you are simply using your own money which you are promising to earn in the future and pay back with interest.
So it would still seem more advantageous to borrow money from the insurance company collateralized perfectly (the insurance company is guaranteed a return by the death benefit they are already contractually obligated to provide).
Another note, you can collateralize other assets of course, but you will usually only be able to get 50-80% of the value as the lender seeks to protect themselves from risk, which is much less efficient. These other assets also do not have legal and tax protections.
Speaking of legal protections, you alluded to this several times in the article and other comments, there are many legal protections against creditors seizing life insurance assets, improved by the private nature of the contract (it is neither reported to the IRS nor any other institution, thus will automatically not show up in asset searches).
The only other item of importance I wonder about is the idea that one no longer requires insurance at a certain point. Insurance is simply shifting risk away from yourself. If you get rid of that insurance, you are taking that risk back. If something unexpected were to happen and wipe out the wealth you accumulated, you would once again consider yourself unable to self insure, and seek to purchase insurance again at less favorable rates. Contrast this with a younger person who purchased a well designed policy with a growing death benefit (the policy I am applying for will have a $900k starting death benefit and guaranteed growth with dividends going to PUA will see it reach $3 million plus by age 121). Even if they went through the same catastrophe and their wealth outside the policy vanished, they would retain the death benefit and any unused cash value to tap into to rebuild. This is especially crucial if said catastrophe makes them uninsurable going forward.
Anyway, just my own thoughts on the self-insurance discussion. I am curious how folks who self-insure manage their risk. It seems like many folks discount the risks of debilitating injuries and costs of long term care and insurance in old age, preferring to gamble they won’t need it rather than locking in guarantees with whole life. Do you have any articles looking into this topic?
I wouldn’t say I’m endorsing it or backhanding it. I don’t do it (so it’s not an endorsement) but I don’t think it’s stupid to do it either (so I’m not backhanding it.) I like to think I’m just explaining how it works without all the hype.
You might not have interest costs, but you do have insurance costs.
Don’t count on the asset protection of people not knowing it exists. If there is a judgment, you’ll be required to reveal it. If your state protects life insurance cash value, great. If it doesn’t, there’s basically no asset protection there.
I disagree that there is a big risk of people who cancel life insurance and then have something happen and need it again (divorce and a second marriage to a younger spouse with tons of kids? Portfolio wipeout?) I just don’t think it happens very often.
Hope your new policy works out great for you and does everything you hope it will.
I self-insure both death and disability now. Since my wealth is a multiple of everything my wife and I will ever spend if we live to 120, I think we’re okay. We’ve got enough money that we could both go into an LTAC tomorrow, stay there for the next 70 years, and pay cash for all of it. Maybe some of the Lean FIRE folks don’t have that much slack in their system, but when you’re FI, you’re FI and no longer need life and disability insurance. I’d guess most people hold it another year or two after FI and that’s fine.
That is a really good point. It is true, I do still need to pay the cost of insurance, despite not having interest costs (relative to a mortgage). However that cost of insurance decreases each year in a policy that is performing correctly until I am actually gaining access to more cash value than the annual contribution. At that point, the cost of insurance to my personal annual finances essentially vanishes, which happens within 4-5 years. Much shorter time frame than mortgage interest costs and I would need the insurance anyway once I get married and start building a family, so it makes sense to me at least to pay the upfront expense now and reap the rewards in the long term. The overall cost of insurance would breakeven later around year 7 or 8. Most folks don’t plan that far into the future though. Everyone wants everything right now. Insurance is a lifetime play though, which few approach from that perspective.
Also given the low interest rate environment, it makes much more sense to keep my emergency savings in an asset that will be liquid when I need it, guarantee a death benefit, and maintain solid growth regardless of market conditions. Just as you said in some of the other comments, I value those aspects more than the short term cost to get started.
I will need to take a closer look at the state level legal protections for life insurance. I personally live in Texas which has pretty strong protections from what I’ve heard, but I haven’t examined the “fine print” yet. I have heard of people traveling to favorable States just to get life insurance protections, but no idea if that is even a thing and seems like a lot of work.
Based on your FI situation, it certainly sounds like you are pretty squared away. Very glad to hear it and I wish you many continued blessings going forward. I especially appreciate your level headed responses.
Thanks for taking the time to respond to my little comment as well. Might have to look at some of your other work to get another perspective on FI.
No, the cost doesn’t decrease. You’re just paying it from the whole life dividend, reducing returns. The cost is flat. In a universal life policy, the cost of insurance actually increases.
My God. Your comments. You are a crazy madman and an encyclopedia of knowledge. Don’t let these life insurance barkers double talk you. My God- you’re too nice.
You are giving them way too much credit and you are having a real conversation about it with them. Don’t waste your breath.
If anything just publish a book that says: “Enough already. Life insurance is a scam..”
You aren’t using your own money you are borrowing from the insurance company’s general account fund while they use your cash value as collateral.
Hi, I know I am responding to an article from some time ago, but my head hurts every time I hear of banking on yourself with whole life insurance policies.
First off I am an ordained Anglican Deacon and a Personal Lines insurance agent. I was unable to complete the Life, Health, and Variable Annuity license due to us having twins, and my current company I work for does not write life policies. So though I am an insurance agent, I am not licensed for Life, so please do not rely on what I say as if it were legal, financial, or insurance advice! Its just my opinion.
0) Life Insurance is not an investment, it is a transfer of Risk!!! It can be a very important part of financial stability, but I repeat it is not an investment! It is a transfer of Risk. (An insurance agent who doesn’t understand this should have their license taken away on the spot!) Repeat this ten times “Life Insurance is not an investment, it is a transfer of Risk!!!”
1) Life insurance agents do a crap job explaining how whole life policies work, because they don’t understand them themselves, and honestly I can say I have never written one, so I know the theory but not the practical things of how specific carriers interpret certain aspects. (i’ve heard junk such as term life policies are like renting a home and whole life is like owning. BS! This makes absolutely no sense because you don’t own anything either way! You are joining in with people you don’t know grouped into a particular risk pool and carrier to help each other through the years as members live or die.)
2) A Whole life policy is written simply to support a level premium over the life of the contract. In plain English, you overpay during the first phase of the policy, then you pay “what you owe” during the second phase, and during the third you don’t “pay enough”. (The true cost of providing protection is much lower at at 20 than age 80 because so few policyholders will die at age 20 but at 80 they sure drop like flies!)
2A) If the expiration of the policy is at age 120, if you live that long, you will see that the carrier will send you a check, less taxes, for what you paid plus dividends, interest, and other gains, less any costs.
2B)If you die before them, because most people are not Methuselah, the carrier will pay the death benefit!
2C) If you cancel the policy, the carrier will return to you your overpayments plus dividends, interest, and other gains, less costs and taxes.
3) The Death Benefit! As your policy enters into the third portion of the payment phase, you are actually not buying enough life insurance, so your cash value is used to supplement the death benefit. Remember, an insurance policy is a contract, not a magic money tree. The money has to come from somewhere!
4) The Cash Value Portion. Yes, you have been overpaying your life insurance policy, so the cash value portion is merely that. If you withdraw your cash value from your policy via a loan, guess what? Your death benefit has to repay that loan! They are just giving you early access to your money!
4A) Participating Policies may even credit your dividends separately so that the total value of your policy grows beyond the death benefit. This is great. These are issued by Mutual Insurance companies, which are owned by the policy holders. They are just returning a portion of your premium to you like a rebate or refund. Its not a magic money tree. It likely comes from higher up-front premium costs
4b) non-participating policies. they don’t grow beyond the stated value and may be issued by mutual or commercial insurance carriers. Likely they will have lower premium payments.
5) Remember that thing I said how Insurance is a transfer of wealth and not an investment? So what should you use your cash value for? Ok, taking a loan and planning to repay the loan makes sense, but I wonder how many people actually do? Its like taking from your big fat saving account. Are you really going to put it back? I’m sure there are some really disciplined people out there, but how many? Remember Jaggers from Great Expectations? The solicitor extraordinaire sees Pip’s first bad decision with his trust fund and realizes Pip is going to blow the whole thing away! Was it any surprise that Pip did just that?
6) Why would you actually want Whole Life?
6A) Insurance, by definition, is a financial instrument used to guard against a loss that is either unforeseen as to if it will happen at all or unforeseen as to when it will happen. We will all die, with the exception of Methuselah who is reading this article at this exact moment! Auto insurance protects against the “if” and not the “when”. Life insurance protects the “when” and not the “if”.
6B) Whole life protects against future un-insurability. If you are 20 and you buy a policy for 20 years, you may have a difficult time getting insurance at 40! I came down with several severe life-threatening food allergies! I am un-insurable now. Yes, I know you are right I can get one of those non-standard expensive “no doctor review” policies. But now that I am, gasp, 45, if I had a 10 year limited pay policy, my whole life policy would be sitting there for our twins if I choke and die on an egg or tomato or cheese or something!
6C)It can be an important part of building intergenerational wealth. You set aside an amount of money each month which you then direct who will receive the death benefit upon on your death if you die prior to contract expiration. It’s probably more efficient to over pay the policy to pay it off in 7,10, or 20 years so you can “set it and forget it” (via a limited pay policy). Sorry it ain’t sexy. Actually I’m not sorry, it ain’t supposed to be sexy. Its like giving your money to your estate lawyer years before you die to make sure your children or grandchildren or whoever get it because you want them to have it after you are gone.
7) Acceptable Uses of Cash Value: Ok, Now that we understand that Insurance is a transfer of risk, and what is not, What would be some general accepted uses for cash value
7A) well, the obvious. It is your money and your needs. You can do whatever Pip Wants, I mean you can do with it whatever you want!
7B) Emergency? Who could argue with that? Pay it back though.
7C) Luxuries? Go ahead Pip!
7D) Funding a business? Didn’t Pip start some enterprise that failed?
8) Summary. Sure you can bank on yourself, and do all kinds of things with your whole life policy. But is it a good idea? Honestly I think its nuts.
8A) Buy a whole life policy if you need it, at the right face value. Don’t buy too much.
8B) If you truly want to bank on yourself – Why not just save a particular amount of money each month and use it in time. You’ll have access to more of the money than through the policy anyway.
8C) Unless you are running a bank and taking deposits that you in turn loan out, you are not banking on yourself. You are banking on a life insurance carrier. You can also use a screw driver to hammer in a nail and a hammer to drive in a screw!
Go Deacon. Go Deacon. Go Deacon.
!!!
First of all thank you for your blog and your insightful analysis.
I am dipping my toe in BOY at the moment and just taking out my first policies.
I did add a LTC rider to my wife’s policy. This was a luxury and not part of the core infinite banking policy. However what swung it for me was the cost. $137 per year for $220,000 in coverage. Given that I am likely to die before my wife and that she will therefore be at higher risk for needing LTC I thought it could help. Now the max payout is only $3,000 per month so we will still be self-insuring for 70% of the cost. But I feel like at a cost of about $10 per month, why not.